Revolutionaries vs. Realists
- 10 March 2025 (7 min read)
Decrypting the US reaction function has become even less straightforward last week. In a “revolutionary” reading of the administration, there would now be an acceptance of transitory pain – in the form of higher inflation and slower growth – as a trade-off against the overhaul of a global economic order which “has not served US interests”. This however is contradicted by a new – partial – reprieve on tariffs levied on Canadian and Mexican products, as well as by Donald Trump’s recommendation to DOGE to cut federal employment “with a scalpel” rather than a hatchet. Yet, while it may be that the administration is hesitating between the “revolutionary” and the “realist” approaches, there is a tangible risk that the market simply decides to “stop guessing” and conclude that uncertainty is simply too high and will erode growth and corporate earnings. The fact that the S&P500 did not immediately salute the rumours, and then the official announcement of the reprieve on Canada and Mexico is striking, in our view.
Where there is definitely a “revolutionary” mood, it’s in Berlin. The announcement that the new coalition would seek to change the debt brake before the new MPs take their seats in the Bundestag was striking. The package is a game changer for the German economy. While it is undeniably a positive for Europe as a whole, it is however difficult at this stage to get a sense of the magnitude of the uplift. This will depend on the import content of the defence effort, whether the EU manages to pull through more joint issuance, and/or if national governments choose to use the spending leeway offered by the reform of the EU fiscal surveillance proposed by the Commission.
The ECB now needs to deal with two opposite risks: on the negative side, the still very tangible possibility the US will slap tariffs on European products. On the positive side the possibility the new fiscal stance in Germany – and maybe elsewhere – lifts growth and inflation. We are still inclined to think that the ECB will have to go lower than 2%, because the tariffs will likely come faster than the impact of the fiscal turnaround, but it has become a closer call.
Disclaimer
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2025 AXA Investment Managers. All rights reserved.