US Consumer Confidence and Stock Market Down
La confidence it's a serious thing that is given to serious things, said a famous advertisement from sixty years ago. Despite the economic policy measures adopted by theTrump administration let the man on the street and the man on Wall Street be a damned serious thing they are withdrawing confidence in those same measures and are becoming pessimistic about their outcome.
Each one manifests it in his own way: the first decreasing purchases of goods and services and the second selling the shares on the stock exchange. Two behaviors that reinforce each other.
In fact, lower purchases (of services rather than goods, because for the latter there is the incentive to avoid price increases from higher duties) reduce the earnings outlook of companies and validate the sale of their shares; the fall of the stock markets spreads further pessimism among consumers and entrepreneurs, decreases wealth of the first and increases the cost of capital of risk for the latter, so both see the reasons for their greater caution in spending confirmed.
The turning point that transformed the honeymoon of the financial markets and US families into a bile moon arrived on Friday: the tragic friday 21 february. On that same day that will be remembered for the worst public altercation that took place in the Oval Office of the White House, with the humiliation inflicted on the President of Ukraine, a figure was released that was followed only by a few insiders: the provisional index Services PMI February, which went in the opposite direction to what was expected. It should have risen to recover from the drop suffered in January due to the wave of severe cold that had hit almost all the federal states, inhibiting many orders, and instead it fell again and a lot due to another type of cold: that of theuncertainty. In fact, PMI survey participants linked lower activity and weak orders to uncertainty generated by the federal policy of increasing tariffs and reducing public spending (free summary of what is read in the press release).
On the other hand, in his State of the Union address on March 4, President Trump acknowledged that there would be some "disturbing" (synonyms are instructive: trouble, that is trouble, but also Harassment, harassment) and that he was “OK with that” (sorry for the poor vocabulary, but it's the original) because “we're doing something big (big, Not great=big)”. And the Secretary of the Treasury, a well-known hedge fund manager, he doubled down by saying that the US economy needs detoxify from addiction from public spending.
However, even if Trump and Bessent are right, "the way still offends me", Dante would have said. In the sense that scares. Because detoxifying is one thing, mutilation is another: to reduce public spending, measures are underway “blind” layoffs, as do pruning machines that use rotating discs. And the stories on social media multiply. So it becomes known that they have been two thousand firefighters left at home without warning, the same ones who heroically put out the fires in Los Angeles.
If even firefighters, who have one of the highest scores for social utility, are fired (“fire the firefighters” is not the name of a new video game), Which worker can feel safe?? In the public as well as in the private. In addition, they have been announced Medicare cuts, that is, healthcare for the elderly: already today American citizens spend more than double on healthcare than European citizens, and now they will have to resort more to their own pockets (out of pocket), and therefore will tend to reduce other types of consumption and increase precautionary savings.
Economic actors fear all this on the basis of qualitative indicators (consumer confidence indices in addition to PMIs) and quantities. Among the latter, for example, the creation of new jobs in February it was not as strong as one would have expected after the "cold" January, revised further downwards; above all they suffer accommodation and catering (-53 thousand cumulative in January-February, against +35 thousand in the average of each two-month period of the previous two years) and construction (+12 thousand against +32 thousand). We add that the total hours worked in February it was at the same level as in October as well as the real wage bill. Finally, the majority of federal layoffs (52 out of 62) occurred after the February labor market survey; more were added in March. And news of this decimation travels faster than the monthly cadence of the employment count.
Will there be a Wile E. Coyote moment?
The collection of qualitative and quantitative statistics is summarized by instant forecasts on the current quarter's GDP, ranging from -2,4% for the Atlanta Fed to +2,7% for the New York Fed. The former also provides information on the composition of its estimate: +0,4% consumption, +4,8% investments (fixed and inventories) and -3,8% net exports (influenced by the jump in imports, including gold, which however does not count for GDP). Consumer spending in January went badly (-0,5% real), canceling out the legacy of the last quarter (+0,5% drag). Of course, no nail has been hammered into the coffin of American economic growth yet, but so far the data are those of yesterday or the day before and so it is a bit like driving looking in the rear view mirror and not seeing that we are going off track. Indeed, in a certain sense, we could be in the presence of a "Wile E. Coyote moment”, when he continues to run beyond the end of the cliff and begins to fall after realizing he is suspended in mid-air.
Germany's Turning Point
Of course if the US economy were to enter a recession, a big but not too much, there would be consequences for everyone other economic systems. Therefore much of this number of Lancet is dedicated to the USA, the largest economy at current exchange rates, the second behind China in purchasing power parity. And also because what is happening there is the news of the month, or rather the last three weeks. However, there is another very important news, even more so if we consider the sudden change in economic positions: the Germany is preparing to run a deficit to finance defense and infrastructure for an amount that, according to some initial estimates, is equal to 12% of its GDP annual. In reality less, because the infrastructure fund will operate for ten years and by then German nominal GDP will have risen by at least 30%. But it doesn't matter: what matters is that is about to boost domestic demand and thus pull the rest of the Eurozone out of the quicksand of the automotive crisis which has its epicenter right in the German system.
because they just got there negotiations concluded between the parties on how to reach the goal and it will take time before that money translates into effective demand. The fact that the goal has been set is already incredible, given that just a few weeks ago the Chancellor in pectore, Friedrich Merz, thundered in his election campaign against a budget policy that would increase public debt. However, the US no longer guarantees security to the Old Continent, and this forces Europe to 'go it alone'. A 'going it alone' that means, first and foremost, spend much more on defense, throwing overboard the Teutonic orthodoxy of Debt= debt=guilt. The frantic CDU/SPD/Green negotiations have led to the amendment of the German Constitution (without changing the debt brake) and to the allocation of substantial funds for defense, infrastructure and environmental protection. The stone has been thrown into the pond and nothing will ever be the same again.
All this happens in a context of reversal of parts: at a global level, the baton is being passed from services to manufacturing; at a macro-area level, the USA is doing worse, theEuro area it's going a little better, along with China e Japan, With the 'India which continues to run. And in the Eurozone the ones pulling are Spain and, a little less, theItaly, while the situation is very bad France, where until now there has been little room for manoeuvre in economic policy (Macron and Parliament are separated at home). Germany would now like to spend and spend. Who would have ever said, even a month ago, that we would have witnessed such role reversals…
Inflation is not falling enough
To understand how the dynamics of the consumer prices there is an almost infallible method: look at the recent trend of wages. The cost of labor, in fact, is the main determinant of inflation. Of course, between this cost and the final price lists there are three important steps: the costs of other inputs, productivity and business margins. If the productivity rises enough, it can neutralize the effect of the increase in labor income; but it can also happen, as in a recession, that productivity drops, and this strengthens the inflationary effect of the higher cost of labor. business margins, then, they are usually quite stable, but depending on the demand conditions they operate like a sort of accordion: they expand when the demand is very hot, they shrink when it gets cold.
This behavior can be clearly seen not only in the statistics but also in the statements of the companies interviewed during the PMI monthly survey (i.e., purchasing managers). For example, in the US in February service companies contained price increases despite the strongest increases in costs precisely because .
In these circumstances the corporate profits are caught between the rock of falling sales volume and the hard place of shrinking margins. It’s no wonder stock prices fall rapidly when a recession looms.
Therefore, where is the wage dynamic at?? Slow but still high decline in the US: hourly earnings recorded +4,0% on an annual basis in February, against +3,9% in January and +3,3% of the 2019 average, but also compared to +4,2% a year earlier; earnings adjusted for the composition effect (wage tracker) also accelerated in February to +4,3%, against the average +3,7% of six years ago (but +5,0% in February 2024). Only the salaries offered for new jobs are already in line with a context of inflation that has returned to the FED's objectives: +3,2% in January, +3,1% in 2019 (+3,4% in January 2024).
Why do we take 2019 as a reference? Not only because it is the year that precedes the upheavals caused by the pandemic, but also because then the dynamics of consumer prices were "normal": +1,8% average per year in the USA.
In 'Eurozone Eurostat statistics on job market are not as rich as the US ones, and are often dated. For example, the latest information available for the trend of labor costs dates back to the third quarter of 2024 (+4,6%). Fortunately, there are the wages offered, made available by a private employment agency: they still give +3,1% per year in January 2025, against the average +2,0% of 2019; in sharp slowdown, however, because they were still traveling at +3,7% a year earlier and again in August 2024.
In Japan, deflation is over, and the cost of labor accelerates to chase prices.
All this does not take into account theeffect of duties, which function as a protection for domestic production only if they increase the prices of competing imported goods, both final and intermediate. Calculating their impact today is impossible, if only because it is not even known on which products and with what rates they will act. Certainly in the immediate future they will give a push up to the cost of living; as also expected by American consumers, whose one-year inflation expectations they jumped to 4,9% in March from 2,8% in December 2024. But then they are recessive, because they erode the purchasing power of families. Unless they set in motion a spiral with wages, unlikely as the economic picture deteriorates.
To sum up, inflation tends to slow down, but not so quickly and this keeps the people on their toes. Central banks.
Rates and stock markets sense a clear change in scenario
“The Economic Consequences of the Peace”: John Maynard Keynes’s famous little book in the aftermath of the 1919 Treaty of Versailles correctly predicted the consequences of the punitive reparations imposed on Germany, which led to the rise of Hitler and the Second World War. The “economic consequences" of the trade war in progress will be, hopefully, less catastrophic, but they will be big, for better or for worse. The bad is obvious: the spirals of tariffs make all losers. The good is less obvious, but it rests on a hope: the America-Europe decoupling, after Trump's latest statements, is a reality. The US no longer guarantees security for the Old Continent, as we said above. And this forces Europe to spend more, first and foremost on defense: a first step towards the famous "United States of Europe"?
I markets were quick to seize this epochal change in the Teutonic attitude towards deficits and public debt, and have sent Bund yields soaring. There is a paradox in this turbulent month. Long-term rates rise, and fall those in the short term, in keeping with the ECB's cut. It's not madness but it's a discrepancy, and there's a method to this discrepancy.
US tariffs and the slowdown of the huge American outlet market are negative for the European economy and suggest a monetary policy that continues to support. While it is true that fiscal policies will become expansionary – and markets evidently believe so – it will take time for spending intentions to translate into actual spending. But markets anticipate, and long rates rise even though short rates have fallen and will have to fall further in the near term.
Government bond yields have risen across the Eurozone: This rise, however, must be seen in relation to the anomalous starting situation: rates were historically low. Even after the jump in Bund yields, the real rate is still zero or negative (if calculated with German core inflation). btp suffered a little, as usually happens when rates rise (bad news for debt servicing), but not much: the spreads have risen modestly with the Bund, but remain at low levels. The BTp-Bonos spread, the 'canary in the mine' that serves to decide whether the increase in the spread with the Bund is a merit of the Bund or a demerit of the BTP, has remained practically unchanged.
The weakening of the dollar, despite the fact that the differential in key interest rates between the ECB and the Fed has increased in favour of the Fed, has made straw of the forecasts of a dollar towards parity with the euro. There are several factors behind this unexpected strength of the euro. The rate differential has turned in favor of the European single currency if, instead of the key rates, we look at the long-term rates, both nominal and real, with the increase in yields in the Eurozone, while the rates on T-Bonds have fallen, in line with the fears of recession. But also on the key rates the situation is evolving: the market expects that Fed should lower rates more quickly compared to previous forecasts.
La chinese coin has remained relatively stable against the dollar. In times of a trade war, it is not the case that the (controlled) exchange rate of the Yuan gives the impression of wanting to compensate for the impact of the duties with a devaluation of the exchange rate. The surge of the euro against the dollar has therefore led to a sharp depreciation of the Yuan against the single currency. Which is not at all pleasant for European producers.
I stock markets were vulnerable, with recent all-time highs on both sides of the Atlantic. The 'barbaric uncertainty' injected by the two sorcerer's apprentices (Trump and Musk) has acted as a catalyst for a correction that was in the air. But the correction could be less pronounced in Europe, with a growth differential that turns to the detriment of America.
Significant – again, who would have ever said it… – is the fact that stock markets penalized those who imposed tariffs, and have rewarded those who are affected. As the graph shows, made 100 the month before the US elections, Wall Street is below the initial level, while the Eurozone and China are above. The champion of performance is the Germany, where prices also rose in relation to the expansionary turn announced for budget policy. It must be said that European stock markets also benefited from the prospect of a reduction in interest rates, which became clear when the ECB followed up the one in September with another cut in October.
And now? As that guy said, “It's always difficult to make predictions, especially when they concern the future.".
Finally we come to thegold, which has crossed the threshold of 3 thousand dollars an ounce. In America the temptation will return to Revaluing Fort Knox Bullion (which have maintained the price of 42,22 dollars per ounce). Bringing them to market values would earn about 773 billion dollars, but the capital gain could only be used to reduce debt: in short, an accounting gimmick and nothing more. In any case, gold sends a signal: the 'safe haven' par excellence says that we really need to take refuge…
