Tariffs continue to take centre stage

Last week, tariff-related developments continued to dominate financial markets. After the market relief in response to President Trump’s postponement of EU tariffs, investors were surprised on Wednesday by a ruling from the US Court of International Trade (USCIT). The USCIT stated that President Trump has overstepped his authority by using emergency economic powers to raise tariffs. The ruling blocks the reciprocal and "fentanyl" tariffs, though not the sectoral ones, and is a setback for the Trump Administration, which is appealing the decision. While the appeal is underway, the tariffs remain in effect.  

As to the implications of this ruling, US trade partners are now more inclined to wait for legal clarity on tariffs before finalising any trade discussions. This reduces the chances of near-term trade deals and could lead to a prolonged period of uncertainty. The fiscal package, which is yet to be approved by the US Congress, might also be impacted. Revenue gains from tariffs, although not a part of the package, are considered an important offset to proposed tax cuts. If tariff revenues turn out to be much lower than foreseen, members of Congress could demand fewer tax cuts or higher spending reductions. Given the upward pressure of tariffs on US inflation, any material change to tariff policy could also impact monetary policy outcomes. 

While the court ruling opens up the possibility of a significantly lower effective tariff rate in the US compared to previous expectations, it is unlikely that the outcome will change for most major US trading partners. Tariffs are a central pillar of the Administration’s economic agenda. Even if the Supreme Court were to uphold the USCIT decision, the government would likely pursue other avenues to impose tariffs. Therefore, we think our base case of slower (but positive) US growth and above-target inflation is still valid. 

US equity markets posted a solid gain for the week driven by easing tariff concerns, Nvidia beating first-quarter earnings and revenue expectations and decent incoming US economic data. Of the latter, most notable was the Conference Board’s jump in consumer confidence after a five-month decline. In May, US stocks posted their best monthly return since late 2023 and are now back in positive territory for the year. Despite the recovery from the April lows, primarily due to reduced trade tensions, US equity markets continue to lag other major regions, particularly Europe and Asia. We see more room for non-US stock markets to perform well, which is why we have a tactical preference for European and Japanese equities. Aside from more attractive valuations compared to the US, these markets have specific structural tailwinds, such as more fiscal spending in the eurozone and improving corporate governance in Japan.  

In fixed-income markets, bond yields fell over the week, partly because US inflation was lower than expected. Personal consumption expenditures (PCE) inflation, the US Federal Reserve’s (Fed’s) preferred inflation measure, fell to 2.1% in April. Despite supportive inflation data, we expect the Fed to hold rates for now as it awaits more data to assess the impact of tariffs on inflation. Businesses will likely pass on the higher import costs to consumers, at least partially. However, most of this impact should be a one-time price hike, allowing the Fed to continue its rate-cutting cycle later this year. Futures markets are pricing in about two Fed rate cuts in 2025, which is in line with our expectations. With the European Central Bank (ECB) in a better position to lower interest rates, coupled with lingering worries around US deficits, we prefer European bond markets over the US. Therefore, we hold fewer US Treasuries in portfolios than usual in favour of short-dated European bonds.  

As to the US dollar, which didn’t move much over the week, we expect it to weaken over time against major currencies. High valuations, narrowing US growth, differences in interest rates compared to the rest of the world and a waning appetite for US assets among foreign investors should continue to exert downward pressure on the dollar. 

Looking at this week’s economic calendar, we will know the eurozone inflation for May on Tuesday. Inflation is expected to ease further, alongside the unemployment rate. Attention will then turn to Thursday’s ECB meeting, with markets pricing in another interest rate cut. We think a rate cut is likely based on inflation approaching the ECB’s target, moderate growth and ongoing tariff uncertainty. Eurozone retail sales for April will be released on Friday, with consensus expecting a decline on the previous month. 

On Tuesday, US order intakes for April will provide an insight into the impact of tariffs – as will the US trade balance on Thursday, the first release since “Liberation Day” on 2 April. Among the more forward-looking indicators, investors will look out for May’s Purchasing Managers’ Indices (PMI), with the PMI for the vast services sector released by the ISM (Institute for Supply Management) on Wednesday. On Friday, investors will closely watch the US job market report for May to see where non-farm payrolls and the unemployment rate stand. This data is crucial for the Fed’s 18 June meeting, where we expect the key policy rate to be kept unchanged. Finally, in China, PMI releases are due on Tuesday and Thursday, possibly indicating a further stabilisation in the economic growth outlook.