Geopolitical uncertainty has skyrocketed, making US businesses and consumers hesitant to open their wallets. While fiscal support is anticipated later this year, the specifics remain unclear.

For now, the economic mood is gloomy. The March FOMC meeting highlighted the negative impact of tariffs on growth and inflation, with the Fed opting to keep rates steady but slashing the 2025 growth forecast and bumping up inflation projections. We note that this puts the Fed in a tight spot. A weakening labor market might prompt rate cuts, but if medium-term inflation expectations continue to climb, those cuts could be postponed. Consequently, we believe the market will struggle to price in more than the 70 bps of easing for the rest of the year.

In the meantime, Europe strikes back as unprecedented defense spending plans are announced. The European Commission has proposed a EUR 800 bln plan to ReArm Europe with a shared funding scheme to the tune of EUR 150 bln. But the biggest ‘bazooka’ came out of Germany, where fiscal policy has taken a sharp U-turn.

Is this the end of US exceptionalism? The growth disparity between the US on one side and the Eurozone on the other, seems to be decreasing. This is visible in the performance of equity and credit markets, where the US has considerably underperformed Europe this year.