Fixed income

The US consumer remains the key

April 29, 2025 - 4 min read

Deputy CIO - Portfolio manager – DNCA Investments

How have these changes affected your broad macro view?

On the one hand, this represents a major change for globalisation and therefore for the global economy. The flow of goods will no longer increase in the future at the pace seen in recent years. On the other hand, confidence, which is partly based on clear and stable economic policies, is unlikely to return anytime soon, as the back-and-forths of the US administration are difficult for economic decision-makers to anticipate.

Have the odds of a US recession increased?

Yes, I think the odds have risen. If you look at the different pillars of growth: firstly, US government spending – this is already contracting due to actions from the Department of Government Efficiency so will unlikely help growth; secondly, from the investment side, the tightening of financial conditions and the rise in uncertainty means the likelihood of a recession has increased.. For us, the elephant in the room is what happens to the third pillar – the consumer. We believe the biggest question is “can the US consumer continue to consume at a high level?” Much of the answer, we think, lies in the inflation number that will come through in the next few months. If inflation remains below 4% (which is roughly where we expect wage growth to be), the slowdown will likely be limited and the US economy will be able to avoid a recession. If, on the other hand, prices rise faster than this, real incomes will fall into negative territory, and neither the savings rate nor the wealth effect from market developments will allow households to compensate for this drop in income. It is therefore highly likely that inflation above 4% will lower consumption and thus result in negative growth.

The impact on prices is expected to be felt primarily during the summer, as many businesses will have built up inventories in the previous months, as evidenced by the sharp deterioration in the US trade balance. In the very short term, however, it is possible that we will see the opposite effect on consumption, with many households rushing to purchase goods before prices increase. That said, if we do get a recession we think it will likely be mild. We do not think it will be like 2008 because there is a low level of private debt from both households and companies, which should help limit the fall out.

How do you think the trade war will impact the European economy?

The impact of this trade war on the European economy is expected to be a slowdown in growth through a decline in exports and a wait-and-see attitude regarding investment. If European households have the means to increase their consumption, this should act more as a buffer than an accelerant. The German fiscal stimulus plan will also support growth in the old continent, but a significant impact should not be expected before at least 2026, and other European countries do not have the means to significantly increase their spending.

On the inflation side, the impact of this trade war is expected to be much weaker in Europe given the expected low level of retaliation from the European Commission. Ultimately, the impact on inflation is even expected to be negative as a result of the decline in commodity prices and the appreciation of the euro. This should open the door for the ECB to continue its rate cuts and potentially shift its monetary policy into slightly accommodative territory.

Are government bonds still a hedge against recession?

I still think they are a valid hedge. We have seen a lot of fear about the status of Treasuries and the US dollar and, while I think the status of the US dollar is questionable, I don’t think that is the case when it comes to the US government bond market. The US Federal Reserve has all the tools to manage the US Government bond market. In a similar way to what we saw from the Bank of England in 2022, we don’t believe the Fed will allow a disorderly increase in US interest rates. That said, we may see an adjustment of twin deficits from the decline in the US dollar.

Have the market moves changed your view on duration?

We tend to be macro-oriented and macro doesn’t move quite as quickly as the political landscape. That said, we have increased duration somewhat. We think we are going to see low reward and higher inflation in the US, while in Europe, we expect the ECB will respond to lower inflation in the Eurozone by lowering its rates.

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