What does Friedrich Merz's 'Whatever it takes' mean for bonds?
Geopolitical and trade woes caused a lot of turmoil in the stock market in recent months. But what does Friedrich Merz's 'Whatever it takes' mean for bonds? Mark Van Assche, account manager Private Banking and Wealth Office, talks to David Willems, senior investment strategist at KBC Asset Management.
02/04/2025
Economy
- The American consumer is pivotal to the economic dynamism of the US. The trade war is creating a huge amount of uncertainty, as a result of which our economists have lowered growth forecasts for this year and next.
- In Europe, additional public spending on defence and infrastructure appears to be bolstering optimism about growth in the medium term, whereas the launch of import tariffs on European products in the US will have an immediate and negative impact.
Commodity prices - inflation
- For the time being, inflation rates are continuing to move in the right direction, thanks in part to lower oil and gas prices. Even so, inflation worldwide – but especially in the US – will increase again due to Trump’s policies (as a result of planned import tariffs and the impact of stricter migration policies on the labour market).
- However, the speed at which higher tariffs will translate into rising inflation remains uncertain, though US inflation expectations for the next 12 months have increased significantly.
Fiscal and monetary policy
- The US government seems determined to reduce the budget deficit, including by means of cost savings in government (DOGE). The question is whether the promised tax cuts can bring relief.
- China continues to regularly support its flagging economy through new policy decisions.
- In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape, although it looks like their impact won’t be felt until 2026-27.
- In April, the ECB cut another 25 bps from its policy rate. A further reduction may follow in the middle of this year. We expect the FED to ease its policy rate this year as well, but the question is to what extent higher inflation (due to the announced import tariffs) will prevent it from cutting interest rates sharply if the economy falters.
Bond markets
- Bond markets are also reeling from the trade war and are anticipating an adverse impact on economic growth and (expected) further cuts in key rates. As a result, yields are falling on sovereign bonds.
- This is largely offsetting the increase in German interest rates at the start of this year.
- US interest rates are falling less sharply for now, as the uncertainty surrounding US debt has increased.
Stock markets
- Taking a 90-day pause before the high import tariffs of ‘Liberation Day’ take effect has given stock markets some breathing space.
- However, whether we’re completely out of the woods is doubtful. Everyone is now subject to the uniform import tariff of 10% – considerably higher than the average import tariffs of 3.5% that had been in place – while China is subject to 125%.
- It remains to be seen to what extent negotiations can turn the tide. Meanwhile, corporate earnings forecasts for 2025 are being lowered, although reporting for the first quarter has got off to a fairly strong start. However, quite a few companies are issuing warnings about the future.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness.
- As far as what will happen to the aid to Ukraine, Trump's policy decisions could certainly have a big impact. As a result, volatility has increased markedly.
- Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.
Stock markets continue to be volatile. Even though President Trump has announced a 90-day pause on tariffs, many uncertainties remain.
Siegfried top, Senior Investment Strategist KBC Asset Management
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