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Markets and macro insights with Bernard Swords, Chief Investment Officer
What happened in financial markets last week?
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Last week was one of the more volatile weeks in financial markets. US tariff policy is still in the headlines, but as much for confusion about the policy as for the proposed measures themselves. World equities were down 2%, in local currency terms led by weakness in the US (the S&P 500 was down over 3%). By contrast, the euro area and Asian markets were up.
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The announcement of a new fiscal package in Germany was a major boost for the euro region; both the size and scope of the spending plans, as well as their significant infrastructural elements, were a surprise. Of course, the package has yet to be passed by the German parliament; if accepted, it could prompt similar initiatives across the rest of the bloc.
What will be the impact of tariff proposals on investment?
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In recent weeks, investors have fretted about the impact of higher tariffs on the US economy. They forget that these tariffs will have a bigger impact on economies outside the US. Since the start of the year, the euro area has outperformed the US by 18% in common currency terms.
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Some developments emerged to boost the euro area that were not expected at the start of the year, such as a potential end to hostilities in Ukraine and the prospect of a substantial fiscal package in Germany. However, the degree of out-performance seems likely to narrow, so that the US will represent a more attractive investment opportunity.
What is the news on interest rates?
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As expected, the European Central Bank (ECB) cut rates by 25 bps to 2.5% last week and will base all future moves on incoming data. As ECB President Christine Lagarde stated in the press conference announcing the cut, the ECB will “more than ever pursue a meeting-by-meeting and data-dependent approach.”
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This means that the bank will closely monitor the extent to which Europe is hit by US tariffs, and the impact on the Eurozone economy of any fiscal easing in Germany and other EU states. If the data continues to follow the trend set by last week’s releases, there will be more interest rate cuts in the second half of this year.
How is the euro area performing?
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Data from the euro area economy last week showed the persistence of an established pattern: a stalling economy with disinflation. Retail sales dropped 0.3% month-on-month contrary to expectations of a slight increase, and are up only 1.2% year-on-year. Meanwhile the inflation report (CPI) showed core inflation down to 2.4% year-on-year. However, core service inflation is still running at over 3% year-on-year, though it does seem set to approach the target rate of 2% in the second half of the year.
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In Germany, the impact on growth of the new fiscal policy is unlikely to be felt until 2026. The increases in defence spending will mostly be directed toward imports rather than local production. The probable boost will derive instead from the infrastructure aspect of the spending package.
What was the outlook for the US economy?
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The US data showed some slowing, but not to any consequential extent. The non-Farm Payrolls figure was slightly below forecasts, and there were some downward revisions to the previous month’s results. The information indicates a maturing rather than a concluded cycle.
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The business surveys (the ISMs) remained in expansion territory, above 50, although the manufacturing survey did decline month-on-month. The services surveys improved slightly. This is only the second month in the last two years that the Manufacturing survey was above 50. Consequently, we would feel that any slowing currently shown by the US economy remains manageable.
What was the news regarding the Chinese economy?
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In China, the National People’s Congress (the main policy-setting group of the country) met and issued the main economic targets. In general, these ambitions were underwhelming. The growth target for the economy was 5%, the same as for 2024. The target general deficit was 4%, 1% higher than in 2024, so there should be more fiscal support in 2025.
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Monetary policy is to remain on a loosening tack, with €65bn made available to recapitalise the banks. All the measures undertaken carry positive implications, but they are incremental in size.
The week ahead: what to watch out for
The University of Michigan’s Consumer Sentiment will be released; this data source provided the first intimations of a slowdown in growth. We will also get the inflation reports (CPI and PPI) from the US. In the euro area, Industrial Production figures will be the only release. The main focus will be on the news from the German parliament, and whether it can agree the new fiscal spending package.
