The stock markets on both sides of the Atlantic have recovered from the turmoil at the beginning of April. Now, however, the focus will be on the impacts of the changed trade policy on inflation and economic growth.
In recent weeks, the stock markets have continued their rapid recovery following the tariff shock at the beginning of April. In Europe, the stock markets are currently at a slightly higher level than they were at the end of March. In the USA, the recovery has been more moderate, and the depreciation of the dollar has simultaneously eroded dollar-denominated returns. Recently, the corporate bond markets have also shown positive development.
A key factor behind the rapid recovery has been the positive news from the trade talks. At regular intervals, news interpreted as positive in the markets has been coming out of the talks – the latest being the 90-day negotiation period announced by the United States and China, during which both parties will significantly reduce their tariffs from what was previously announced.
The dollar has depreciated significantly this year, but encouraging news from the trade talks between the United States and China has reversed the trend. The price of gold, on the other hand, has been surging this year, but recently the price has taken a downward trajectory. The price of oil has also been declining due to, among other things, an increase in OPEC countries’ production volumes and the weakening of economic growth expectations.
Currently, there are two factors that are particularly central to the economy: inflation and economic growth.
Inflation figures from both the USA and Europe have moderated towards the central banks' two percent inflation target. Monetary policy is currently easing, although the US Central Bank, the Fed, has taken a timeout in lowering its key interest rate while the European Central Bank has continued its cuts.
Central banks can seek to influence monetary policy by changing their key interest rate or their balance sheet. Currently, all major central banks have reduced their balance sheets, and the key interest rates are also on a downward trajectory.
In the USA, inflation expectations for the current year have clearly strengthened, thanks to, among other things, changes in tariff policy. Tariff decisions are expected to have negative effects, as they are believed to weaken international trade and thus economic growth. The central question in the markets right now is how much economic growth will weaken.
It is noteworthy, however, that although economic growth expectations have been revised downward, the consensus in the markets is that the economy will still grow this year in both the USA and Europe. The growth figures are only more moderate than previous expectations. The fear of a recession that prevailed in the markets at the beginning of April has also dissipated, although growth is expected to slow down.
Although the actual inflation figures are not currently a challenge, inflation is likely to cause concern for the Fed. In the USA, inflation expectations are currently on a clear rise while economic growth appears to be clearly slowing down. This combination also weakens the Fed’s ability to ease its monetary policy.
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