The art of policymaking is a lot about setting expectations against which all future decisions are assessed. When President Trump famously introduced his extreme tariffs on ‘Liberation Day,’ markets were obviously concerned. Since then, resilience in US labour markets, better-than-expected earnings, and trade war de-escalation have boosted sentiment. Risk assets have rebounded, and bond yields risen.
Whether this upside on risk assets is sustained depends on economic performance and clarity on trade policies. For bonds, pressure on the long end of the curve will remain due to fiscal issues/high debt notably in the US (not least because of Trump’s tax bill) and Japan. For the time being, we upgrade our growth projections for the US, EZ, and China, and downgraded US inflation. More specifically:
- Growth forecasts upgraded in the US and Eurozone (EZ). The reduction in tariffs has led us to upgrade our US economic growth numbers (real GDP, year-on-year) slightly from 1.3% to 1.6% for both this year and for 2026. This is still a deceleration when compared with last year, and we think growth will remain below potential and consumption will be weak. In the EZ, growth projections have been upgraded to 0.8% for this year with significant divergences at play for Spain, Italy, France and Germany.
- The Fed’s and ECB’s response to any weakness in the economy is key for the markets. The Fed, as was evident from its most recent decision, will only be reactive. While markets have lowered their expectations of Fed and ECB rate cuts, our views on the Fed and the ECB are unchanged in terms of the number of rate cuts this year.
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