Trump's antics make markets uncertain

The economic news shows a mixed picture this week. While Trump again lashes out at Fed Chairman Powell and the American industrial indicators fall sharply, Chinese figures surprise positively. Analysts are pessimistic about Germany and in our own country job growth is stalling. In the meantime, the ECB is following up with another interest rate cut and the freeze on social rents will have a depressing effect on the inflation figure.

President Trump’s ways remain inscrutable. First he announces insane tariffs. They haven’t even gone into effect yet or he delays them for 90 days and then he declares he’s going to do deals with trading partners. Or take the position of Fed chairman Powell. He was originally appointed to that role by Trump in his first term. Powell was reappointed by Biden. Trump lost confidence in Powell in his first term as president. Now he seems to want to get rid of him as soon as possible. That’s not easy, because a Fed chairman can only be fired ‘for cause’.

I am not a lawyer, but I understand that there must be evident failure, fraud or other very serious misconduct. Powell's term as chairman runs until May of next year. But Trump is in a hurry because he sees that his policy will lead to a short-term economic collapse. Significantly lower interest rates could perhaps give the economy a boost that will ensure that the economy clearly recovers before the 'mid-term elections' for Congress are held next November. Trump also has a new candidate ready, former Fed director Kevin Warsh. Incidentally, the Fed can control the short-term interest rate, but its influence on the capital market interest rate is limited.

The question is what Trump will achieve with the pressure on Powell. First, it does not seem likely that he will be able to get rid of Powell in the short term. Attempts to do so could lead to a loss of confidence and therefore to higher capital market interest rates. That is the last thing Trump wants. Second, it is questionable whether policy will change drastically under a different Fed chairman. The policy committee consists of 12 people who are allowed to vote. And third, it should be said that Warsh was one of the hawks in his first period at the Fed (2006-2011). In the meantime, I feel sorry for Powell, who is visibly suffering from the pressure and the commotion.

Philly Fed index plunge
It is becoming increasingly clear what effect Trump's idiotic policies are having on the economy in the short term. Consumer confidence has weakened considerably and consumer inflation expectations have risen sharply. Last week I also reported that the confidence index of SME entrepreneurs has been falling like a stone in the past two months. This week it also turned out that the Philly Fed index has taken a sharp dive. This index measures the confidence of entrepreneurs in the Philadelphia Federal Reserve district. The index fell from 12,5 in March to -26,4 in April.

Economists like to look at the assessment of order intake. That sub-index tumbled from 8,7 in March to -34,2 in April, an exceptionally sharp drop. Never before has this sub-index in a basket fallen so far, except for two months into the pandemic. The series goes back to 1968. I should note that the comparable Empire State index, which measures roughly the same in the New York Fed district, actually recovered slightly in April. And the labor market is showing no signs of shrinking. In the most recent week for which figures are available, 215.000 people filed for unemployment benefits. That is a low number.

German ZEW index also plummets
Trump's antics are also having a major impact on sentiment elsewhere in the world. The ZEW index for Germany, which measures analysts' expectations for the German economy, practically imploded in April. The index ended at -14,0. In March, it was 51,6. If Trump were to make a U-turn, such an index could of course rebound just as quickly. And it is possible that political developments in Germany have also had a negative impact on analysts' confidence, because the Merz government's budget plans are disappointing.

Chinese figures actually exceed expectations
How different are the latest Chinese figures. Of course I view them with a certain amount of suspicion, but economic growth in the first quarter was certainly not disappointing at 5,4% year-on-year and 1,2% quarter-on-quarter. Chinese exports performed remarkably well in March. The export value in March was no less than 12,4% higher than a year earlier (+2,3% in February). It is obvious to assume that this is a temporary development because companies tried to anticipate Trump's import duties in March. Base effects may also have played a role. Last March was a weak month.

However, the value of exports to the US in March was only 4,5% higher than a year earlier. Incidentally, exports to the US seem to have come to a complete standstill since the US import duties came into effect. Well, we will have to see that in the April figures in a month.

Chinese industrial production growth also accelerated in March, to 7,7% year-on-year (the highest figure since June 2021), up from 5,9% in February. Of course, this too may be related to wanting to get ahead of US tariffs. There are two important observations to be made about Chinese economic policy. First, the urgency among policymakers has increased due to Trump’s policies and they are pursuing a more clearly stimulative policy.

Perhaps more importantly, President Xi in February made a kind of peace with big business again. A few years ago, he had banned them after Alibaba founder Jack Ma criticized the policy. But the president apparently realizes that people like Ma can be useful to him given the economic challenges facing the country.

Dutch labor market weakens
In our country, unemployment rose from 3,8% in February to 3,9% in March. That is of course still a low level and the labour market remains as tight as ever. That also leads to as high wage increases as ever. The AWVN reported this week that the collective labour agreements concluded in March included an average collective labour agreement wage increase of 4,3% on a 12-month basis. Given the disappointing development of labour productivity, such a figure is incompatible with inflation of 2% unless profit margins take a hit.

As is well known, our inflation rate of 3,7% in March is much higher than the 2,2% of the eurozone. That gap will decrease significantly in the course of the year. Last year, the sharp increase in tobacco excise duty drove up inflation by about 0,5 percentage points. That excise duty has remained unchanged this year. The rent increase last year even contributed about a full percentage point to inflation. This week, the government decided to freeze rents in the social sector for two years. That came as a shock to the housing corporations and they reacted furiously.

The investment space of corporations is considerably limited, which may mean that less can be built. However, inflation will experience a considerable push downwards from July, although it is not clear by how much rents in the private sector will increase this year. But the social rental sector is about four times larger than the private sector. So you can count on the fact that the freeze on social rents will push inflation down by about 0,8% or perhaps even a little more from July. That will also reduce the costs for the government resulting from the indexations of various benefits.

Incidentally, in the CBS report on the labour market I came across some figures that I would like to mention specifically. Unemployment increased by an average of 7.000 per month in the first three months of the year. This was mainly because more people entered the labour market, a trend that we have been seeing for some time. But the figure that I would like to pay special attention to is the growth in the number of jobs. In the first three months, this increased by an average of 1.000 per month. That sounds pretty good, but in February it was still 6.000 and in January it was even 15.000.

So it seems that job creation is falling back rapidly. Because the figures are monthly averages over three-month periods, we may have already switched from growth to shrinkage each month. That would be consistent with the message that the UWV came out with this week. That organization reported a clear increase in applications for mass layoffs. Our labor market remains tight, of course, but a loss of jobs is not a favorable development.

ECB cuts interest rates again
The ECB has cut interest rates again. It was the seventh cut in a row. A while ago it seemed that the hawks in the board were getting a bit more say and that an interest rate break might be imminent. That turned out to be wrong. If Trump's import duties ultimately go ahead, that will depress economic growth and actually push up inflation. In principle, that poses a dilemma for a central bank. However, the ECB made it clear that for them the growth effect weighs more heavily than the inflation effect. The reason is that weak or even negative growth will ultimately depress inflation. I think that is correct. In the past, I have looked closely at periods of stagflation. My conclusion was that such periods do not last long because the stagnation depresses inflation quite quickly. However, the central bank will keep a close eye on inflation expectations. If they increase, the risk increases that the in principle one-off impact of import duties on inflation will still lead to a longer and persistent process of inflation.

summarizing
It’s a strange world. Trump’s erratic policies are adding to the uncertainties. All sorts of confidence indicators point to a considerable short-term economic downturn. The harder numbers suggest that the US economy is doing pretty well for now, but those confidence indicators have a creditable track record as short-term predictors.

In Europe too, confidence indicators are experiencing the negative impact of Trump. In China, the latest macro figures are positive, although it is not clear whether this is because companies have tried to anticipate the American import duties or whether the good figures are due to economic policy.

In our own country, social rents are being frozen this year. That is a blow to the corporations and will seriously hamper the realization of the construction ambitions. But it is favorable for inflation, because the rent increase last year pushed inflation up by approximately 1%. It is important to closely monitor developments in our labor market. It remains tight for the time being, but the growth in the number of workers has virtually come to a standstill in March. Are we on the eve of a loss of jobs?

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.