Global Economy Exhales as Trump’s Rhetoric Meets Reality
The world breathed a collective sigh of relief as Donald Trump’s first week in office failed to unleash the economic chaos many had feared. Despite campaign promises of sweeping trade barriers, the new US administration focused on domestic issues, leaving the global trade landscape largely unchanged.
A Surprisingly Cautious Start
Trump’s restraint has given central banks around the world room to maneuver, with the European Central Bank, Bank of Canada, and Bank of England considering interest rate cuts in the coming days and weeks. The US Federal Reserve, however, is expected to hold off on further easing, citing a still-hot economy and the ongoing risk of tariffs.
Tariffs on Hold, For Now
Trump’s threat to impose a 25% levy on imports from Canada and Mexico from February 1 has been put on hold, and his conversation with Chinese President Xi Jinping has raised hopes of a deal. The Chinese Commerce Ministry has expressed willingness to work with Washington to maintain stable trade ties, easing market concerns about inflation.
Market Reaction
Stocks rallied, oil prices dipped, and rate cut expectations were bolstered as markets reacted to the news. The dollar’s exceptional gains since November’s election were reversed, and the Bank of Japan went ahead with a well-telegraphed rate hike.
A Shift in Tone
Some leaders have pointed to Trump’s tone shift on China as a significant development, suggesting a desire for a new understanding and a desire to avoid a continuous unravelling of a relationship crucial to the global economy.
Uncertainty Remains
Despite the relief, policymakers are treading carefully, aware that Trump’s unpredictability could still spark volatility and uncertainty. The People’s Bank of China has held fire on interest rate cuts or liquidity injections, showing signs of concern over the yuan’s recent depreciation.
Emerging Markets Wait and Watch
Emerging market central banks are not expected to turn hawkish, with the exception of Brazil, which has restarted a rate hike cycle. Trump-induced volatility and inflation risks limit room for rate cuts, and policymakers are waiting to see how the situation unfolds.
The Fed Takes Center Stage
This week’s Fed meeting is the immediate focus, with the irony being that the main reason US inflation is only coming down slowly is that the economy is proving more robust than expected – a boon for Trump. The challenge now is to maintain this soft landing without destroying the economy.
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