"The US economy is set to face a combination of weakening growth and rising inflation, at odds with the Fed's dual mandate of maximum employment and price stability. The Trump administration's trade policy has put the Fed in a difficult position and resulted in a high degree of policy uncertainty for financial markets, households and businesses," Krautzberer says.
In addition, the erratic behaviour of President Donald Trump adds to volatility on both tariffs - which are on and off at regular intervals since April 2 - and his view on the Fed's independence.
"Erratic US trade policy and pressure from President Trump on the Fed to cut interest rates has also resulted in market participants questioning US policy credibility; term premia for longer-dated bonds has risen - as investors demand greater compensation for owning US Treasury risk - while the US dollar has also come under downward pressure," Krautberger points out.
However, if a US recession is confirmed, and global growth decelerates sharply, the markets may cause treasury yields to fall.
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"Trade policy uncertainty will continue to be a source of volatility for financial markets over the coming months. We think the current macro and policy environment favours US yield curve steepeners. We also think that the US dollar will face ongoing headwinds through 2025, so we prefer to have a short US dollar footprint in portfolios," Krautzberger adds.
On the equity front, a Deutsche Bank (DB) report dated April 28 and authored by Stefanie Holtze-Jen, Chief Investment Officer APAC, Jason Liu, Head Chief Investment Office APAC, and Swati Bashyam, Investment Officer APAC, makes a case for relooking at Chinese tech. "MSCI China Tech still trades at a discounted 12-month forward P/E of 22.2x vs 26x for the Magnificent 7 index," the DB trio says.
China's big tech companies' revenue exposure is mostly domestic. Services companies such as the Chinese online gaming industry are not at present exposed to tariffs, the DB report points out.
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At any rate, Trump keeps changing his mind on tariffs. "Our working assumption is that average tariffs will end up being around 35%, a level which should be manageable as China has already diversified its export markets following the first trade war with the U.S. in 2018," DB says.
In addition, the Chinese government has announced a stimulus to shield the Chinese economy from the impact of the tariffs. These include supporting low-income groups, strengthening job security, unemployment insurance subsidies, low interest consumer loans, elderly care facilities and additional government spending financed by plans for RMB4.4 trillion of local government special bonds and RMB1.3 trillion of ultra-long term special central government bonds in 2025.
"A combination of these factors could support Chinese big tech companies on a medium-term horizon, with current levels potentially offering attractive entry points," the DB report says.
