Former President Donald Trump has reignited market volatility by announcing steep tariffs on February 4, targeting key trading partners Canada, Mexico, and China. While tariffs on Mexico and Canada have been temporarily deferred for a month, the announcement sent ripples through the global economy. Investors and analysts are now scrutinizing central bank moves to assess the potential impact on international trade and growth.
In their first policy meetings of the year, both the European Central Bank (ECB) and the Federal Reserve (Fed) refrained from offering substantial new insights. The lack of direction has left markets speculating on future monetary policies amidst fluctuating inflation data in the euro area. While energy prices have pushed headline inflation slightly higher, underlying price pressures continue to weaken, raising questions about the region's economic resilience.
The state of the labor market remains a crucial factor for Fed officials in setting monetary policy. Despite this focus, Danske Bank suggests that markets might be misjudging the balance of risks. They argue that inflation threats are being overestimated while growth risks are underestimated. As a result, both the Fed and ECB are anticipated to cut interest rates more than what current market pricing suggests.
The recent US GDP growth data further complicates the economic landscape. Recording a modest 0.6% quarter-on-quarter increase for Q4, it fell short of expectations. Meanwhile, the euro area showed no growth in the same period, reflecting economic stagnation. However, there are glimmers of hope as the euro area's composite Purchasing Managers' Index (PMI) crossed the 50-mark for the first time since last summer, signaling potential expansion.
In Japan, after prolonged hesitation, the Bank of Japan raised its policy rate to 0.50%. This move indicates a shift in Japan's monetary stance amid global uncertainties. Additionally, Germany's manufacturing sector showed signs of a less pronounced downturn in January, offering some optimism for Europe's largest economy.
Despite these mixed signals, global markets remain on edge as they anticipate key data releases. The upcoming US Job Openings report is expected to be closely monitored ahead of Friday's January employment figures. These reports may provide critical insight into the labor market dynamics that influence Fed policy decisions.