NOTE: The piece was written on Wednesday, May 28
All corporatism encourages inflexibility, discurages individual accountability and risk magnifying errors by concealing them - Margaret Thatcher
Another week has passed, and the financial landscape remains largely unchanged. Therefore, this week’s note remains relatively short. Despite Trump's recent threat of 50% tariffs on the European Union, which nudged yields slightly lower, the impact has been minimal.
Global 10-year bond yields are marginally down from last week. Frankly, it seems Trump has crossed a Rubicon where his threats are increasingly dismissed. A glance at Polymarket (Chart 1) shows that virtually no one expects his 50% tariff threat on the EU to materialize by June 1.
Unsurprisingly, the stock market remains unfazed. The DAX continues its climb, and the S&P has rebounded. Gold has dipped slightly, but its chart still looks far from bearish. Oil (WTI) hovers just above $60 per barrel, while copper trades sideways.
Little has challenged my view that stocks could see further upside while bonds remain vulnerable. Although many factors could theoretically disrupt markets, tariff threats don’t seem to be one of them.
With new PMI data released this week, let’s dive in. The Eurozone Flash PMI hit a six-month low, reflecting heightened uncertainty. Germany joined France in contracting territory, while the rest of the euro area continues to grow. However, HCOB chief economist Cyrus de la Rubia notes reasons for optimism despite rising input costs, which could pose challenges for the ECB.
While consensus leans toward further rate cuts, ECB hawk Robert Holzmann urges caution. In a recent Financial Times interview, he argued that the slowdown stems from uncertainty, not restrictive policy, and recommended holding rates steady until September. He also suggested that easing monetary policy is already lowering borrowing costs, likely stimulating the economy. Though Holzmann claims his views aren’t isolated, he’s likely in the minority on the Governing Council.
Still, I believe he won’t prevent further cuts, which could pressure long-end yields over time. A recent headline supports this: NATO’s Mark Rutte expects the upcoming Hague summit to agree on defense spending increases to 5% of GDP.
With France already projected to allocate 6.6% of tax revenues to interest expenses, Europe’s fiscal challenges could soon demand attention and deliver a harsh wake-up call.
This contrasts with ECB President Christine Lagarde’s hope, expressed this week, that the Trump presidency could usher in a “global euro moment.” Markets, however, remain cautious about the dollar. A stronger dollar could spell trouble for the euro area.
In the US, the dollar’s outlook remains precarious. Trump’s tariff threats extend beyond countries to businesses, recently pressuring Apple to manufacture iPhones domestically or face tariffs. Such moves echo the corporatist economic policies of Benito Mussolini, blending state and corporate power. While this may sound extreme, similar policies are quietly prevalent across Western governments, though less overtly than Trump’s approach.
The debate over whether tariffs will fuel inflation or disinflation remains unresolved. However, signs suggest companies are raising prices, which could temporarily drive inflation. This week’s US Flash PMI reported stronger business activity and optimism, with a notable uptick in inflation:
Average prices charged for goods and services jumped higher in May, rising at a rate not witnessed since August 2022, when pandemic-related shortages caused widespread price inflation.
Moreover, real-time inflation data from Truflation indicates a sharp price increase in May, as highlighted in Chart 2, shared on X by James Bianco of Bianco Research. Bianco noted:
Truflation measures more goods than services. Goods inflation is lower than services inflation. So, the rate of change is more important than the level.
If Truflation’s data holds, it could deter the Fed from cutting rates. Meanwhile, the Trump administration’s embrace of persistent fiscal deficits undermines hopes of “growing out of debt,” as Scott Bessent suggests. In reality, the US faces indefinite deficits with no feasible path to outgrow them.
All signs point to increased liquidity, continuously higher inflation, and their consequences: a potential stock market boom, upward pressure on long-term yields, and persistently higher inflation. Deficits remain a chronic issue for Western governments. That’s the week in review.
I know why you plague me
I know why you blame yourself
I know why you plague me
I know why you blame yourselfSlipknot – My Plague
Have a great weekend!
Fabian Wintersberger
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All my posts and opinions are purely personal and do not represent the views of any individuals, institutions, or organizations I may be or have been affiliated with, whether professionally or personally. They do not constitute investment advice, and my perspective may change over time in response to evolving facts. IT IS STRONGLY RECOMMENDED TO SEEK INDEPENDENT ADVICE AND CONDUCT YOUR OWN RESEARCH BEFORE MAKING INVESTMENT DECISIONS.