Uncertain times

Yearning for a crystal ball

Uncertainty has kept risk assets from staging a meaningful recovery this week, as confidence ebbs that the US will remain “exceptional” in a world of tariffs and slowing growth momentum. The US administration’s tolerance for economic pain seems much higher than markets were hoping for and, oddly enough, none of the growth-boosting measures like tax cuts and deregulation that propped up the market last year remain in focus. This week has been all about how central banks make sense of this uncertainty.

Stuck between a rock and hard place

This week, the US Federal Reserve (Fed) left interest rates unchanged, marking up its inflation projections and revising down its growth projections. Yet, markets interpreted this meeting rather dovishly. The chair downplayed the recent rise in consumer inflation expectations and indicated a preference to ease policy if weak survey data bled into the labour market.

Nevertheless, the Fed faces a challenging trade-off between a bout of inflation that is arguably a one-off tariff-related price increase, and an economy that is exhibiting slowing momentum. With inflation still elevated, it will be difficult to discern between this tariff-related inflation and other core price pressures that they would prefer to act upon. Delaying rate cuts could also risk hurting growth at a time when business sentiment is already fragile. And waiting for greater clarity on disinflation or hard data to change risks being behind the curve.

The Bank of England (BoE) is facing a similar conundrum, with an economy behaving rather sluggishly and inflation not coming down as fast as it had hoped. In contrast to the Fed though, this week’s BoE vote split was rather hawkish, as only one member voted for a cut. In particular, it speaks volumes about how concerned the committee is regarding the coming uptick in inflation and how relaxed they are about the state of the labour market.

Goodbye sick man of Europe

German lawmakers passed the government’s landmark spending package that would allow for hundreds of billions of euros of debt financing for military and infrastructure spending, marking a major fiscal shift after decades of budgetary austerity. Market growth expectations for the eurozone have been marked-up aggressively this year in anticipation of this announcement, with the euro rallying alongside domestic stock prices.

Consumption in focus for China

Staying with this theme of stimulus, China unveiled a multi-part plan to increase household demand in the short run, and improve the growth environment in the long run. The action plan outlined a broad approach, including raising income and wealth, improving the social safety net, expanding the consumer goods trade-in programme and removing various purchase restrictions.

This was an important milestone for the country given how falling property and stock prices have weighed on consumer sentiment in recent years. The focus on consumption is also necessary to help transition the economy’s growth engine away from investment and exports. Alongside major breakthroughs in AI, investors appear to have really turned a corner for investing in Chinese stocks.