Crédit Mutuel AM: Trade tensions and global economic resilience
The bond markets finally got the better of the Trump administration's trade war ambitions, and quite quickly. It seemed unlikely to us that the stock market decline would force the US president to reverse his decisions, but we didn’t anticipate that rising rates could achieve the same result. Yet, this is apparently what happened after the steepening of the US yield curve, with the US 30-year yield hovering around 5%, close to its highest level since 2007.
The 90-day truce announced in mid-April, however, is probably only an episode in what could be the 2025 saga. The market now seems to anticipate that US tariffs will ultimately stabilize at a fairly low level, which would be negative for US growth but wouldn’t cause a recession. US growth forecast for 2025 is 1.4% (Bloomberg consensus), implying 2% growth in the coming quarters after the negative growth in Q1. This seems optimistic to us today. Regarding inflation, current expectations point to a significant increase in prices in the short term (inflation fixed above 3.5% at the end of the year) but little long-term inflationary effects.
The current situation looks like 2022-2023, with surveys indicating a significant risk but real activity figures remaining very solid. This is undoubtedly what is keeping growth forecasts at a consistently high level. However, here again, we are a little more concerned than the consensus: unlike 2022-2023, there are fewer excess savings and therefore no consumer reserves. We therefore think that a reduction in consumption in the coming months is likely, once the effects of the trade war are felt, which should begin to happen over the next 3 months. The Conference Board surveys and those concerning investment intentions are currently at historically dangerous levels, a fact we find difficult to ignore.
We should also remember that this time, the Fed will certainly not be anticipatory but rather reactive. If inflation expectations are credible, which they historically are in the short term, the Federal Reserve will face a core inflation (implicit) of above 3.5% in the second half of the year, which will allow it to lower rates only if there is a sharp decline in activity, especially in the labour market. Will the fed have enough data in June or July to act? Probably not. Therefore, the fed shouldn’t be counted as a support for markets, as has often been the case in the past.
What can we learn from the market reaction at this stage?
In the eurozone, the situation is a little more readable. Growth remains weak and trending downward due to current uncertainties, but it is not collapsing. The consensus is expected to gradually adjust downward. On the inflation front, the ECB should face fewer problems despite the high inflation in April linked to seasonal adjustment issues around Easter. The rise of the euro and the fall in oil prices are also good news for the old continent.
These latter points bode well for global growth in the medium term, but are not enough to offset the negative short-term effects. The decline of the dollar historically has had beneficial effects: reviving global trade, easing the burden of dollar-denominated debt for emerging countries, and rising commodity prices. Thus, Latin American emerging markets currently appear well positioned: they are rarely targeted by the Trump administration and will greatly benefit from the appreciation of their currencies (high dollar debt and high inflation). The same logic applies to the drop in oil prices, which should lower business costs and improve purchasing power.
It is therefore possible that markets will be surprised by the resilience of global growth at a later stage, but we believe it is too early for these positive effects to be felt.
We therefore remain cautious at this time, while being aware that policy can change the situation at any time. The US administration's announcement of tax cuts (July 4 according to Bessent) could also provide support for the market, but its financing seems uncertain for the time being and potentially dangerous for the long end of the US yield curve, which is already under pressure.
May Outlook
Uncertainty remains high, linked to political decisions. The markets' baseline scenario currently seems a little too optimistic given the potential risks. The risk of disappointment regarding the ongoing trade negotiations appears high, which could reverse the optimistic outlook investors currently have.
