​Since President Trump announced a pause on tariffs in early April 2025, equity markets have rallied significantly. As shown in Figure 1, the S&P 500 rallied by more than 15% in the past five weeks and closed last week with a positive performance in 2025. Despite this rally, market participants remain hesitant, as uncertainties regarding the long-term effects of tariff policies linger. Goldman Sachs, while acknowledging the positive momentum, still projects a significant chance of recession, having recently reduced their recession probability from 45% to 35% following the tariff pause and recent trade developments.

​In early April 2025, President Trump reignited trade tensions with sweeping tariffs - 10% on all imports and up to 50% for countries with "unfair" practices, hitting China hardest at 145%. China retaliated with up to 125% tariffs, blacklisting US firms and restricting exports of rare earths. Facing global backlash, Trump announced a 90-day delay for most countries (excluding China) and eased tariffs on key sectors like tech and pharma. Markets, initially hopeful over pro-business policies, turned volatile as concerns over aggressive trade moves mounted. The VIX spiked to 60 on Liberation Day - levels not seen since 2008 and 2020. Upon the delay of the tariff implementation, volatility eased quickly, as shown in Figure 1. Volatility levels have dropped to below 25, which is only slightly elevated compared to historical levels.

​Over the past weeks, a key election for Europe took place in Germany. Elections turned out as expected with strong gains of the CDU and AfD and heavy losses of the previous ruling coalition. It also showed a significant shift to the right. It is highly likely that the CDU will form a coalition with the SPD to achieve a majority. With a stalling economy, the removal of their “debt brake”, which limits the country to borrow at maximum 0.35% of their GDP, is high on the agenda. In conjunction with Trump’s administration, European countries will likely increase their defence spending over the coming years, as Europe is contributing significantly less to NATO than the US. The new administration in the US is also not slowing down after its highly active start on 20th January 2025. In particular, the proposed and increasingly severe tariffs have caused markets to plunge in the past weeks. Not only are companies hurt directly by countermeasures of other countries, but it also causes significant headache on a return of increasing inflation with already high interest rates.

​After peaking inflation in the US in 2021 and 2022, inflation decreased in 2023 to below 4% in the summer and steadily hovered between 3% and 4% until summer 2024. At the time, US inflation fell below 3% for the time in years and followed an optimistic trend to as low as 2.4%, before inflation started to pick up again October 2024. Since then, inflation steadily rose to 2.9% in December 2024. While the development overall is promising, the most recent trend is worrying, as interest rates remain at high levels.
To combat inflation, the Federal Reserve increased interest rates aggressively to as high as 5.25% - 5.5% until late 2023. Initially, cuts were expected by spring 2024. Eventually, the Federal Reserve started cutting interest rates aggressively in autumn 2024. By the end of 2024, US interest rates are between 4.25% and 4.5%. Originally, cuts in the same magnitudes were expected for 2025. These expectations were crushed by Powell in the Fed’s December meeting, in which he suggested that there will only be two 25bps rates cuts throughout 2025. With inflation expected to remain between 2% and 3%, the US labour market will mark an important decision maker for the Federal Reserve for their short-term interest rate policy. Additionally, Trump is another unknown, as he is a strong advocate for lowering rates sooner rather than later. However, while he can influence a lot, it is unlikely that his view will have an impact on the monetary policy, especially as it is virtually impossible for him to replace Powell as Chair of the Federal Reserve. Powell also proved in their meeting at the end of January 2025 that he is not swayed that easily, when the Fed decided to hold interest rates at current level. Figure 1 shows the development of inflation and interest rates in the US, the Euro zone, and the UK from 2023 to January 2025.