We have just returned from marketing in the UK over the past week (March 3-7th), which overlapped with announcement of Germany’s unprecedented fiscal package and several tariff related announcements.
During the week, our European economics team revised up their German / Euro area growth forecasts and lifted their terminal rate forecasts for the ECB to 2.0%. In contrast, our US economics team revised down their growth forecast, while raising their recession probability from 15% to 20%. We summarize the key discussion points from our meetings with EM focused real money funds and hedge funds below. We also provide our most recent views on the topics discussed.
The consensus view of investors, at our Macro Conference in Hong Kong (21-22 January) just more than a month ago, was that 2025 would be another year of US exceptionalism (versus EU and Chinese growth), US equity outperformance, USD strength and USD/CNH poised to rise higher if/when tariffs came into effect. Fast forward to now, the US exceptionalism theme has faded, the outlook for Europe was initially boosted by hopes of a Russia/Ukraine deal and later propelled by Germany’s unprecedented fiscal spending program. Our European economists upgraded their German and Euro area growth forecasts, on the anticipated infrastructure and defense spending.
Meanwhile, the outlook for China’s asset markets have also improved. Housing data has shown some signs of stabilization, the emergence of DeepSeek revived hopes on the (at the time) lackluster equity market, and the Chinese leadership appearing to embrace tech entrepreneurs, providing further support for the equity market. The barrage of back-and-forth tariffs announcements has increased uncertainty. Our US team have revised up their tariff expectations to include global product-specific tariffs (including autos) and reciprocal tariffs to their baseline.
As a result, our US inflation forecasts have been lifted to 3% by year-end, while our US growth forecasts have been lowered to 1.7% for Q4/Q4 2025. This shift in narrative over the past few weeks has weighed on the broad USD (with DXY down by around 5% since its pre-inauguration peak), boosted the EUR, and helped to lessen the upside pressure on USD/CNY, despite two rounds of tariffs being implemented on China.
