Tariffs – US signs trade agreements with EU and Japan
Last Sunday, the EU and the US sealed a deal introducing 15% tariffs on European goods — less than initially threatened, but more than what the EU had pushed for. The EU also pledged massive new investments in the US, in addition to its existing ones. As a result, trade uncertainty should now have less impact on the markets. Additionally, the US and Japan signed a new agreement last week, setting tariffs at 15%. Japan will invest US$550 billion in the United States. Its auto sector is now in a much better position, facing a significantly lower tariff rate than previously feared. Automaker stocks skyrocketed on the news.
ECB – Bar for cuts now higher
Last Thursday, the ECB left its three key rates unchanged. The tone was hawkish, with President Lagarde suggesting that the ECB is in a comfortable position. Markets swiftly repriced, reducing the probability of another rate cut in September to just 20%. While the euro’s strength may exert some downward pressure on inflation, the bar for an additional cut is now higher.
FED – Another hold expected this week
This week, the Fed is expected to keep rates on hold, marking the eighth consecutive month at the current level. However, following this meeting, markets are already pricing in two additional cuts before year-end, with an 85% probability. President Trump continues to call for much lower interest rates. With inflation not surging and the labour market softening, maintaining real rates at their current elevated levels will be increasingly difficult.
Algebris Investments’ Global Credit Team
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