Weekly focus: Still waiting for political clarity

Donald Trump's policy announcements continue to draw a lot of attention and create significant intra-day market moves but ultimately not clarity on economic policies and few lasting effects. This week, we had the announcement of so-called reciprocal tariffs where the US will base import tariffs on restrictions that US companies face on their export markets. That could imply large tariff hikes on for example goods from the EU, as the Trump administration seems to consider European VAT as equivalent to an import tariff, and the prospect initially weakened the EUR against USD. However, the actual announcement was vague with few details and the statement that countries might be able to avoid them, and markets ended in risk-on mode. As previously announced, the administration will examine the US trade deficit before 1 April, which also seems to be the deadline for the reciprocal tariffs.

The Trump administration also pushed for peace between Russia and Ukraine, leading to hopes that this could benefit the wider European economy but also concerns that the US would accept a stronger position for Russia that could pose risks for both Ukraine and EU countries in the longer run. Hence, it is not obvious that a peace agreement would open up for renewed large-scale energy export from Russia to the EU or would allow European countries to reduce their rearmament ambitions. There would be a need for rebuilding Ukraine which could benefit some European companies but also put further strains on public finances in EU countries.

On the data side, US CPI inflation came out significantly higher than expected at 0.4% m/m in January for the core measure, with the surprise being broad across categories especially within services. Together with the recent increase in household inflation expectations, this weakens the case for a Fed rate cut in March, although it should be noted that the January number may be distorted by one-off price adjustments. We still believe that rates should be cut significantly as monetary policy is restrictive, but the Fed has signalled that it is not in a hurry to do so, as the economy is broadly still quite strong. Also, Chinese inflation was higher than expected at 0.5% y/y in January against 0.1% y/y in December - so still low inflation, but moving up, and China could be less of a disinflationary force in the world economy going forward.

The most important data releases in the coming week are likely to be the PMIs for the major economies except China that are due on Friday, with US regional surveys coming in the days before. Especially in Europe, PMIs delivered some positive news in January as the decline in manufacturing seemed to slow. It will be interesting to see if we move further in that direction this month, supporting the view that the European economy is slowly being supported by rising real incomes and lower interest rates. There will also be plenty of attention still on politics, with talks about Ukraine currently ongoing at the Munich Security Conference and with the German election Sunday next week. We do not expect the election to make a large difference for the near-term economic outlook though, see Research Germany - Limited economic impact from German election, 6 February.

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