Business and consumer sentiment in the US is collapsing, and hard data may soon follow. With tariffs acting as an exogenous shock, investors are preparing for recession — not inflation — and abandoning the US Dollar, Commerzbank's FX analyst Antje Praefcke notes.
USD loses its safe haven shine
"The mood is not only affecting sentiment, but will presumably soon also affect hard data. If you look at how quickly the mood among companies in the US (ISM Index) and among consumers deteriorated even before the big announcement last Wednesday, you don't need to be an expert to predict that things will continue to go downhill after 'Liberation Day.' Because for now, both for companies and for consumers, uncertainty remains high, prices are likely to rise, incomes are likely to fall and the stock market, as the last pillar of income, seems to be breaking away as well, given the see of red on the (global) stock markets in recent days – the US stock markets have lost more than 10% of their value since Liberation Day."
"After all, not everything is as simple as Trump might think. In my view, by drastically increasing tariffs, he is creating an 'artificial' exogenous shock to world trade and thus to the world economy. The only problem is that the US is part of this world economy. And as long as the US consumes more than it produces, it is difficult to completely isolate or fence itself off. Especially not overnight. In this respect, Trump is biting the hand he is currently riding on."
"This is why the market is now pricing in around 100 bp of interest rate cuts for the Fed. In other words, the market is evidently weighing the economic risks (i.e. the US sliding into a recession) higher than the inflation risks resulting from higher tariffs on imports to the US. This is one of the reasons why the US dollar has come under so much downward pressure since Liberation Day."
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