Too Many Open Fronts

After a few relatively quiet weeks on the trade front, Donald Trump chose to “up the ante” by announcing a 50% tariff on EU products from June 1st. European equities, understandably, did not react well, but what we find the most interesting in the market’s response last Friday was the fact that, against economic theory, the dollar weakened versus the euro. This would reflect the fact that the entire policy stance in Washington is increasingly seen by the market as counter-productive for the US themselves, at a time when concerns about the US fiscal trajectory – fuelled by the House’s approval of the “Beautiful Budget Bill” – would already be enough to inject a significant risk premium in US financial assets. It may well be that the White House has opened too many fronts simultaneously. 

Of course, a 50% tariff on EU products could trigger a substantial recession in the Euro area – combined with the euro appreciation GDP could fall by 2% relative to baseline – but the impact on the US economy from European retaliations, albeit smaller, would still be tangible: the EU is a much bigger market for US producers than China. The resilience in US long-term interest rates may not have a large immediate impact on the financial position of US corporations – the fear of the “maturity cliff” has incentivized a lot of them into pushing the bulk of their refinancing needs to 2028-2029, but for households, high mortgage rates, combined with the tariff shock on purchasing power and hesitant equity prices, are not helping. The concessions on trade had allowed the US President’s polls to stabilise in the last few weeks. This may change again with last Friday’s announcement. All this may convince the Europeans that they should not “fold too quickly” and consider the latest threat as another ingredient in a negotiation which can continue under the initial deadline (9 July). 

Still, there was at least one piece of good news coming from the US last week: the Supreme Court has explicitly protected the Federal Reserve from the risk of an early dismissal of Jerome Powell. This reduces the risks of the tariff-induced inflation shock turning persistent, at least until Powell’s replacement in May 2026.