Stagflation jitters continue as Trump maintains tariff plans

The market wobbles have continued off the back of Friday’s US data dump, with fears around a stagflationary environment coming as Trump reiterates the plans to impose tariffs. For the most part Europe remains a relative haven as traders weigh up the sky-high valuations for big tech names in the US. President Macron did his best to provide a united front with Donald Trump yesterday, stroking his ego in a move that lifted hopes of a Russia-Ukraine deal that will show consideration for European and Ukrainian interests. Ultimately, the start of the Ukraine war marked a turning point for the German economy, and the prospect of an end to that war should continue to provide support for equity valuations at a time of concern for US indices. Warren Buffet’s move towards cash highlights the fear that US stocks are overvalued, with Berkshire Hathaway now a net seller of stocks for two years. His statement that there are few opportunities in the market does highlight the difficulty for your everyday stockpicker, with the 25 P/E ratio for the S&P 500 standing in stark contrast to the likes of the FTSE 100 (17), DAX (18), and Hang Seng (15).

The US stagflation story has sparked widespread risk-off sentiment since Friday afternoon, with the contractionary US services PMI survey (49.7) coming alongside a surge in Michigan 5-year inflation expectations (30-year high). The sub-50 reading for US services does help allay some of the inflation fears associated with the sector, although the manufacturing metric did see a rebound for price pressures as businesses gear up the imposition of tariffs. While Trump’s one-month delay to the Mexico and Canada tariffs did provide a relief rally earlier in the month, he insists that they stand ready to impose them next week as things stand.

Looking ahead, traders will be watching closely for signs of economic weakness within the latest conference board consumer confidence survey. Coming off the back of last week’s 0.6 decline to 104.1, markets are predicting a steep pullback to 102.7 this time around. The fear here is that we are already seeing negative implications for the US economy via the mere threat of a trade war, and rising inflation coupled with actual implementation of those tariffs could bring higher prices and a weakening economy. Doge efforts to drive down debt through cost cutting may ultimately prove beneficial for the US finances, but that also provides a potential negative headwind for the jobs market over the coming months.

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