Macro outlook improves despite the geopolitics

In the headlines, geopolitical have overshadowed an otherwise benign macro environment in early 2026. While market jitters around the US intervention in Venezuela and the sudden tariff threats over the control of Greenland faded quickly, the events have left a sense of unease of what might come next. Oil and gas prices rose towards the end of January not just because of the cold winter weather, but also due to the US reportedly considering military strikes against Iran.

Even so, changes in financial conditions have generally been supportive for economic growth. Oil prices have mostly traded below levels seen last summer, equities and other cyclical assets have performed strongly, and the broad USD has weakened. And the economy is responding – global manufacturing PMIs have recovered from the trade war induced declines of early 2025, particularly in Asia.

The trade war uncertainty has naturally not fully abated yet. Beyond the Greenland saga, US President Trump has threatened tariff hikes against South Korea, as well as secondary tariffs against those buying Iranian oil or exporting oil to Cuba. But in the big picture, it is worth remembering that the average tariff rate of all US imports has still declined over the past 6 months. After the latest trade deal struck with Taiwan, we estimate that the average pre-substitution tariff rate is hovering close to 17% - down from close to 26% last May. Based on realized tariff revenue and import values, the effective post-substitution rate was only 12.1% in November.

Analyst consensus has continued to lift its 2026 economic growth expectations for the US (2.3%) and maintained them steady for the euro area (1.2%). In the US, high-frequency labour market data appears to have stabilized after weakening through most of last year. The Fed’s Powell appeared optimistic that downside risks are now easing, when the US central bank maintained its monetary policy unchanged in January. In the euro area, markets’ short-term inflation expectations have declined below ECB’s 2% target, but economic growth still surprised positively in Q4. We expect the ECB to repeat its guidance of monetary policy being in a ‘good place’ in the early February meeting, and to maintain the current policy rate unchanged through both 2026 and 2027.

At the end of January, Trump finally nominated Kevin Warsh as the new Fed chair. Warsh boasts a credible resumé with experience from both the Fed board of governors and the private financial sector. Markets received the news positively, as the USD regained ground and precious metals prices turned lower. Note that markets’ near-term policy rate pricing was little affected by the nomination. While Warsh has occasionally sided with Trump in calling for lower rates in the US, we still think his nomination should reduce concerns regarding the Fed’s independence.

Also, Congress has pushed back on Trump’s attempts to influence central bankers. Senator Thom Tillis vowed to block any new Fed nominations after the Department of Justice opened a criminal probe against Powell. Tillis reaffirmed his stance after Warsh was picked, but we generally believe the nomination should be palatable for the Senate. The US Supreme Court also appeared sceptical about the charges against Governor Lisa Cook in mid-January hearing. With markets’ long-term inflation expectations well anchored, the Fed is still looking resilient against political influence.

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