Summary
Trade wars continue to complicate policy decisions
The spring meetings in Washington are a useful platform to gauge opinion of policymakers, economists, bankers and investors from around the world. In this latest edition of our monthly investment views podcast, Monica Defend, Head of Amundi Investment Institute, catches up with Swaha Pattanaik on her return from the US to share Amundi’s latest investment views and talk about the mood in Washington, and what this might mean for the markets.
They discuss the impacts of US tariffs and the retaliatory measures on the global economic outlook, looking particularly at the consequences for growth and inflation expectations. They also consider what’s next for central bank moves and Amundi’s forecasts for interest rates. Finally, they wrap up with the main convictions for some of the major global currencies, as well as the equity markets and some of the big things to watch in emerging markets.
Disclaimer: This podcast is only for the attention of professional investors in the financial industry. Outerblue by Amundi. Welcome to Outerblue Convictions, Market Analysis and Asset Allocation Views.
Swaha Pattanaik: Hello, thank you for joining this monthly Amundi podcast, where we discuss our views on the global economy and financial markets. I'm Swaha Pattanaik, and it's my pleasure to welcome Monica Defend, the head of the Amundi Investment Institute. Monica, hello and great to have you join us again.
Monica Defend: Thank you, Swaha. Thank you.
Swaha Pattanaik: So, Monica, you recently attended the IMF Spring Meetings in Washington. I mean, apart from it being a lovely time of year to visit DC, these biannual gatherings are the ideal place to get a snapshot of what policymakers, economists, bankers and investors from around the world are thinking. It couldn't be a better time to do that right now either. What was the mood like in Washington?
Monica Defend: Well, first of all, I think that the main feeling was this policy uncertainty that is eventually translating in what will happen next, both on the official side, but also on the investor side. Having said that, the mood was quite constructive. I mean, probably true consensual views, having in mind no recession, weaker US dollar and eventually Europe as an opportunity. Probably the people I met over there were really constructive, more constructive than I was on the way through for Europe, meaning the integration, and the work to reduce fragmentation in Europe is becoming real.
Swaha Pattanaik: Thank you. So, I mean, you were talking about the mood being constructive and in line with some of your thoughts. How have US tariffs and the retaliatory measures we've seen notably on the part of China affected the outlook for the global economy, and particularly the US economy, given we've also had some Q1 data out since we last spoke?
Monica Defend: Well, first of all, the main impact was that people were not talking anymore about forecasts, but reference trajectories, which is somehow what we are doing when we pencil our forecasts and the way we see the markets evolving over time, subject to a list of assumptions that is getting longer and longer, and unfortunately is changing quite often, probably too often to get proper forecast. So that eventually is really the narrative that is more important than the numbers. Having said that, with these tariffs in mind, we do see a stagflationary environment materializing, therefore lower growth, but not a recession and higher inflation. When it goes to the US specifically, eventually we didn't change our projection for the year that for the time being remains 1.3% GDP projection. Because we believe that the negative number of the first quarter that was even more negative than what we were expecting, it's really biased by statistical events, elements, and probably we might see a rebound in the second quarter, more specifically. Imports were quite high because there has been a front loading, but at the same time inventories have not been rising to the similar extent. So probably this will be reflected into the second quarter numbers. Europe as well, I came out with its number without the details at country level. But there what we see, it's a material improvement in domestic demand, which is positive even beyond exports. And then on China, given the level of time so far, which is unsustainable. It's going to be effective, therefore, how we kind of reduced the GDP expectation. But then let's see. There is a forthcoming meeting between the U.S. and China in Switzerland. Big expectation there. Honestly, I think this is just one step towards a journey that is going to last two to three years, if we stick to what Bessent said recently. There is this discrepancy between hard data and soft data that somehow is reflected on the markets, equity and fixed income. We might talk about that later on. And then the question mark is on the roadmap of the US administration on its policy rollout. So, we have seen the tariffs announcement, but then we expect the tax cuts and the deregulation as part of the programme that might have different, I expect it to have, different impact on growth.
Swaha Pattanaik: Thank you for that. It's a lot of moving parts to take in. And when you were mentioning the emphasis and reference trajectories, I think you said, rather than forecasts, one has to feel for central bankers, particularly the Federal Reserve. You spoke about a stagflationary environment. Now, that is complicating issues because it's sort of both the dual mandate elements are being hit, if you like, lower growth and higher inflation. What's the outlook for the Federal Reserve, which is moving very gradually? And how does it compare with other major central banks?
Monica Defend: Well, the Fed is data and policy dependent. I've been mentioning the sequencing. So while the tariffs, now we do think will have a fluctuation or impact on the economy, on tax cuts and deregulation, you do expect this to be growth friendly. So this is something that the Fed need really to take into account. Therefore, this policy dependence, in our opinion, will imply they will stay on hold, also next month, but we do believe the three cuts will remain in the pipe. So 3.75% is the terminal rate we confirm for this year and then we'll see in 2026. This is something that we are still assessing. On the ECB front it's easier, also because the strength of the euro is helping in carving the inflation dynamics so leaving the space, the room, to the ECB to cut and we do see 1.50 as a terminal rate. And similarly, on the Bank of England, we confirmed the three cuts, having in mind that eventually the inflation dynamic will have cooled down somewhat.
Swaha Pattanaik: So let me pick you up on that issue that you're mentioning about the strength of the euro. And at the beginning, you mentioned the consensus in Washington around a weaker dollar trend as well. Where are you expecting that exchange rate to go in the coming year?
Monica Defend: Well, when it goes to the weakness of the US dollar versus the euro as a reference, as a fair value we have 1.24 as a fair value. So this is the direction of travel for this year. What is happening in emerging markets is different because emerging markets continue to maintain their strength. So it is really a matter of identifying the the single pattern, probably versus the euro it's a broader conversation we might have with the investors really questioning the treasury and the US dollar as the reserve assets. I think is a little bit premature to have this conversation meaning that we are only 100 days into this new environment and this kind of changes that are structural will require more time. What I see is a lack of directionality on the Treasury. Honestly, we don't see a major movement on the 10 years yield. For example, the two years is better priced by the market. So if I consider the currency, probably the euro curve at this level is more appealing than the US curve.
Swaha Pattanaik: Okay. What about equities, though? So, I mean, we're speaking just a day or two after the UK signed a trade deal, framework trade deal, perhaps, though all the details are still, you know, to be hammered out, with the US. And that, interestingly enough, because this is not necessarily the usual market moving thing, was taken really positively by global markets as an indication that the tariff situation could ease globally. What do you think awaits equities?
Monica Defend: Well, the equity markets, and this is kind of unbelievable, completely recovered since the announcement at the Liberation Day. When it goes and let's stick to fundamentals, the reporting season in the US has been good, better than in Europe, so the fundamental picture for the time being has been holding. But the fact that some of the big names are avoiding to provide forward guidance, encourages us to think that probably we've seen the best out of it, and eventually also analysts will reduce their expectation that the timing remains at 10%, we do have 6% out of the S&P 500. And therefore, in particular on the US market for the time being, we remain cautious, while we remain constructive on Europe. So this is a story of the small and medium cap, it's about euro and the UK market, as you were mentioning. So the main asset allocation remains cautious, but we do have and we do maintain this preference at regional level. Probably in the month to come, given that apparently the attitude will be to focus tariffs on specific sectors. Therefore, it will be, again, a story of bottom-up, and a sector story, more than the traditional regional asset allocation.
Swaha Pattanaik: Thank you, Monica. We're nearly out of time, but let me finish on emerging markets. It's a very heterogeneous story, as we always emphasize, but particularly so now because there are some geopolitical flare-ups, notably in India's sort of Pakistan frontier. We are also getting Chinese, some Chinese stimulus. What's your overall picture and perhaps you could pick up on one or two of the biggest EM economies to give us your views?
Monica Defend: Yes, well, unfortunately, we need to cope with geopolitical risk and at this point, really, I mean, the short-term volatility that you might experience, as it has been the case, fundamentals remains quite sound, in India, in particular China, as really to cope with the tariff story that is an exogenous shock on top of the need of the country to rebalance domestic growth towards consumption. And they will do whatever it takes to get into that direction. So we maintain the view and constructive view on emerging markets while navigating the short-term noise and managing the risk at that level where it is needed.
Swaha Pattanaik: Monica, thanks so much for taking the time to join us and giving us some guidance amidst all this uncertainty with your reference trajectories, as you said.
Monica Defend: Thank you, Swaha, my pleasure.
Swaha Pattanaik: Thank you for listening to us today. We'll be back next month, but in the meantime, check out some of our other podcasts on the Amundi Research Centre, or on your preferred podcast platform.
Disclaimer: This podcast is only for the attention of professional investors as defined in Directive 2014-65-EU dated 15 May 2014 as amended from time to time on markets and financial instruments called MIFID II. Views are those of the author and not necessarily Amundi Asset Management SAS. They are subject to change and should not be relied upon as investment advice, as a security recommendation, or as an indication of trading. for any Amundi products or any other security, fund units or services. Past performance is not a guarantee or indicative of future results.
