Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) has provided his thoughts on the US and Euro Area inflation and the outlook for global economies.
The EA GDP numbers, while backward-looking, reveal that the pace of growth of the Eurozone economy exceeded expectations.
But the 0.4% quarterly gain looks somewhat misleading. A large 3.2% surge in Ireland’s GDP contributed to a quarter of the growth of the regional block.
Irish GDP developments tend to be driven more by the accounting decisions of multinational corporations than domestic factors.
That said, the Eurozone relatively positive rate of expansion isn’t likely to last if US trade tariffs are enacted.
While the extra rate cuts from the European Central Bank we envisage are likely to cushion some of the downside, and Germany has room for fiscal spending, more rate reductions and a fast-tracking of the defence and infrastructure plans would be needed.
In contrast, US GDP growth surprised to the downside, showing a mild contraction relative to expectations of a sluggish expansion.
But this isn’t a real surprise, as previously released trade data showed that the outright decline was largely due to stockpiling prior to the tariffs, causing a surge in imports, which cut into GDP.
But consumer spending growth, while not booming, was positive, and investment was quite solid, even though government spending contracted.
More forward-looking indicators, however, point to a deterioration in sentiment, so here too whether the tariffs are ultimately enacted in full is a key swing factor.
US policy sequencing, that is, implementing tariffs now, with a negative effect, before the positive impact of tax cuts and deregulation, has spooked markets.
And the broader, underlying theme is that we now live in a more multi-polar world, fragmented along geopolitical lines. In a sense, the outcome of the Canadian election is a reflection of this new context.
But it’s easy to take this too far and only focus on tariffs and fragmentation. Although it will likely come at a later stage, given the need for Congress approval, the Trump Administration will now likely focus on fiscal support and deregulation.
Fiscal stimulus should be a tailwind for the US economy and markets, offsetting some of the downside risks from higher tariffs.
The rest of the world is also likely to see fiscal stimulus, alongside monetary stimulus in the form of interest rate cuts, which are more likely in the eurozone, where inflation is lower, than in the US, where it’s stickier, with the UK somewhere in between.
In Europe, the key theme of the past few months among policymakers has been extra European spending and investment, from defence to infrastructure.
Because of this key catalyst, we’ve recently increased exposure to European equities to a tactical overweight.
And we’ve recently diversified away from broad US equities, where valuations were demanding, especially in technology, to an equal-weight index.
The index gives a higher weighting to more attractively valued sectors, such as US industrials and financials, which could also benefit from trade protection, fiscal stimulus and financial deregulation.
In fixed income, we’re underweight US Treasuries on fiscal concerns, preferring short-dated European government bonds and UK gilts.
