Hello there,
The torrent of executive orders and pronouncements on trade coming out of the White House are rattling the narrative of U.S. exceptionalism.
As my colleagues Lewis Krauskopf and Laura Matthews point out, going into this year, investors were betting that President Trump's policies would spur U.S. stocks and the dollar to outperform global peers. Instead, uncertainty over what's in store is rattling consumers and businesses. So far in 2025, the U.S. benchmark S&P 500 has risen just over 1% against a roughly 7% climb for an MSCI index of stocks in over 40 other countries, while the greenback has slid about 3% from its January peak.
On Wednesday, Trump sowed confusion about the timing and scope of global tariffs. Worries about the domestic growth outlook are showing up in the data with a release out this week showing consumer confidence falling at its sharpest pace in 3-1/2 years.
Some of the faltering in U.S. stocks is down to the surging popularity of DeepSeek, a cheaper Chinese artificial intelligence model. The tech sector has driven most of the US equity market's gains and Nvidia's quarterly outlook failed to significantly quell fears of overspending in the sector.
It's still early days in the Trump presidency. Federal government layoffs have yet to show up in U.S. jobs data and most of the threatened tariffs haven't been implemented. But the fear among economists is that consumer and business concerns about what the policies mean for growth and inflation will become a self-fulfilling prophecy.
In the meantime, equity strategists aren't giving up on the U.S. trade. According to a Reuters poll, they expect the S&P 500 to finish this year up 9%, unchanged from a survey in November. They're betting on solid corporate earnings and Trump's plans for deregulation and tax cuts to boost performance. But they do caution that tariffs threaten inflationary pressures.
So where does that all lead the Fed? A key inflation print is out on Friday that could offer some clues. A rate cut from the European Central Bank next week is seen as a done deal by investors. In fact, traders who bet on the future course of inflation foresee the sharpest divergence since 2022 between the U.S. and euro zone, driven by different growth paths, tariff threats and cheaper European energy after a potential Ukraine peace deal.
One place where the pace of inflation is not in doubt – the coffee market. Dry weather in top producers Brazil and Vietnam has triggered a surge in prices on wholesale markets and with a months-long lag in retail prices that means the cost of your daily brew is expected to keep climbing. I'm sorry. You can hear all about it on this week's Reuters Econ World podcast. Listen here.
As always, I'd love to hear from you by hitting reply on this email or finding me on LinkedIn.
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