Signs of weaker economic growth in the US have hit a nerve in markets, and the constant political uncertainty is certainly not providing any help. US equities fell and energy prices declined with Brent now trading around USD73/bbl. – the lowest level since late December. European equities continued to outperform after the German elections despite Trump threatening the EU with broad-based 25% tariffs.
While the timing of the EU measures remains still uncertain, Trump surprised markets on Thursday by signalling that the 25% tariffs on Canada and Mexico will be enacted when the one-month delay runs out next Tuesday. Just two days earlier he said that the hikes would be delayed by another month until 2 April. Trump also upped the ante on China by announcing another 10-percentage point tariff increase, mirroring the first hike that took place earlier in February. While we have anticipated Trump gradually increasing the tariffs against China all the way to 40% by mid-2026, he has been moving ahead faster than we expected, as the average rate could reach 32% already next week.
Of course we cannot rule out another last-minute ‘deal’ to delay at least part of the measures, as White House sources have flagged that discussions between the parties are still ‘ongoing’ (see Reuters). But if fully enacted, the measures could increase the effective trade-weighted tariff rate on all US imports close to 11%, which would be the highest level since WW2. The Tax Foundation has estimated that the direct negative impact on the US economy could be around 0.3% even excluding possible tariffs on the EU and any potential countermeasures that could follow.
Bond yields have generally declined amid shaky risk sentiment. Yield spread between the US and Germany tightened, as markets are preparing for increased bond issuance and potential loosening of the German debt brake to finance growing needs for defence investments. Read our quick take in German election – A positive outcome for markets and the economy, 24 February. On the geopolitical front, we will closely follow Zelenskyi’s trip to Washington to sign the preliminary mineral deal between the US and Ukraine today.
And while the ‘growth-negative’ aspects of Trump’s policy agenda seem to take effect much faster than the ‘growth-positive’ ones, overall US fiscal policy stance still looks set to remain expansionary over the coming years also. This week, the US House of Representatives managed to advance a proposal for the upcoming budget reconciliation bill, which instructs for a cumulative USD 2800bn of new deficit spending over 2026-2034. Read our take in our Reading the Markets USD – Gradual easing still in sight, 25 February.
Next week, we expect the ECB to cut rates by 25bp, which is fully priced in by markets. We think the cuts will continue below current market pricing until the deposit rate reaches 1.50% next September, see our full ECB Preview – A cut is the easy part, 28 February. Euro area flash HICP for February will be released ahead of the meeting on Monday, and we forecast 2.2% y/y for headline (Jan. 2.5%) and 2.4% y/y for core (Jan. 2.7%). From the US ISM manufacturing and services, and finally the February Jobs Report are due for release. We expect NFP growth to slow down to +120k (Jan. +143k) due to negative seasonality, federal layoffs and slowing immigration constraining the growth of labour supply.
