The Wall Street Journal aptly summed up last week's turnaround: "Trump finds his master: the markets." Although he claims to pay little attention to stock market reactions, the American president was clearly shaken by the recent panic that shook American assets to the point of intervening (successfully, by the way...): the dollar strengthened against the euro, the US 10-year bond fell again (-9 bps last week), and stock indices rebounded (+4.59% for the S&P 500). To calm things down, Donald Trump first changed his rhetoric on the trade war, suggesting a possible de-escalation. The United States is thus reportedly open to bilateral discussions with China to reduce customs duties, provided that China also lowers its own ahead of the talks. Specifically, according to several sources, the Trump administration is considering a reduction in duties from 145% to 50-65%! It remains to be seen whether genuine negotiations have begun: S. Bessent, who met with Chinese representatives on the sidelines of the IMF meetings in Washington, stated that he did not address the issue of taxes. The second issue that alarmed investors: the Powell case. Here again, Donald Trump attempted to reassure, stating that J. Powell would complete his term in 2026 and that his criticisms were primarily aimed at a lack of responsiveness, not his position. The Fed therefore remains independent, despite the American president's calls to lower rates. The institution is maintaining its cautious course, which remains the watchword according to regional central bankers. Several public statements have reiterated the need not to act precipitately, at the risk of amplifying the inflationary pressures generated by the trade war. However, if the labor market were to deteriorate sharply, different actions could be required.
In Europe, the Trump administration has, paradoxically, simplified the ECB's task. The scenario is becoming clearer: risk of disinflation in the face of a rising euro, potential influx of cheap Chinese goods, and a further slowdown in activity due to trade tensions. IMF economists are now forecasting growth of only 0.8% for the eurozone in 2025, compared to 1% previously, and recent PMI surveys confirm this trend. Preliminary indices for April sent a negative signal, with a decline in new orders, which portends a slowdown in activity. In the short term, industrial production remains solid, but this strength is partly attributed to the anticipation of new customs barriers. In this context, some central bankers, notably O. Rehn and P. Lane, are considering the possibility of a significant 50 basis point cut in key rates as early as the June meeting! While the consensus is more around a 25 bps cut, the communication from ECB officials clearly aims to demonstrate their capacity to intervene to support the economy.
Finally, on the diplomatic front, it should be noted that senior US administration officials urged Russia and Ukraine on Sunday to reach a ceasefire following the one-on-one meeting between Donald Trump and the Ukrainian president at the Vatican on Saturday. Both confirmed their desire to reach an agreement; the ball now seems to be in Moscow's court to achieve it...
