Market Uncertainty Persists Due to US Trade Policy, Says BNP Paribas Economist

ECB Rate Cut Expectations

• 💡 The ECB is expected to implement another interest rate cut, as the disinflation process was already on track.
• 📈 Factors supporting a cut include a rising euro, falling energy prices, tightening financial conditions, and exacerbated downside risks to growth.

German Economic Sentiment Decline

• 📉 Germany's ZEW economic sentiment index saw a significant plunge from +51.6 in March to -4 in April, missing Reuters poll predictions.
• ⚠️ This decline is linked to increased focus on near-term downside risks from trade policy uncertainty, impacting investor sentiment.

Impact of US Trade Policy on Markets

• 📊 US trade policy and tariff uncertainty are causing significant volatility in financial markets, including the Treasury market.
• 📌 The persistent uncertainty, even with some moderation from the Trump administration, leads to a tightening of financial conditions.
• ⏳ It is likely that uncertainty will remain an elevated and persistent feature of the economic environment for the next few years.

Federal Reserve's Challenging Trade-off

• ⚖️ The Fed faces a difficult trade-off between real downside risks to the economic outlook and upside risks to inflation.
• 📈 Inflation expectations, as seen in data from the University of Michigan and the New York Fed, are showing a pick-up.
• ⏸️ The Fed is expected to stay on hold for the remainder of the year to balance these competing risks.