The news of the morning trophy resides with how the US and Japan have finally come to terms on tariffs. Such is they way of things that a 15% tax on trade is presented as a victory by the Japanese side of the argument not only politically, but speculatively in how car maker shares have roared by over 10%. Faced with an August 1st tariff of 25%, and that car exports make up a substantial part of Japan’s exports to the US, the reprieve rally in auto shares allowing the Nikkei to increase by 4% is more than understandable. But a tax is a tax, and with no allowances for a cut in aluminium and steel levies it will be interesting to see how long the enthusiasm lasts. President Trump gleefully announced how Japan would be investing $550 million into the US and that it has agreed to increase imports of American agricultural foods and products. How this bill of laden is paid for and absorbed by the Japanese economy is for future consideration, for now, any deal in a storm is considered a victory.

Oil prices remain unimpressed and although there is a small sympathetic move higher, the negative bias grind does not appear to be abating. This is despite the US Energy Secretary, Chris Wright, saying in an interview with Fox News that is a “very real possibility” sanctions will be deployed against Russian oil to bring an end to the Ukraine war. Given that there is still forty days or so left of the fifty granted to Moscow to come to the negotiating table, oil practitioners are not inclined to react. The upcoming Sino/Europe summit is catching the eye. Not just for how a fractured relationship might be made right and by some miracle a trade deal is thrashed out, but how aggressive the Europeans are in negotiations possibly signifying the way in which the bloc might handle deal-making with the US.  

The ECB has bought itself some time

So many of the headlines and much of the narrative surrounding central banks is taken up by what the Federal Reserve might do and the self-induced farrago that is Donald Trump’s incessant attacks on the Reserve and its Chair. Such is the noise of the undermining drilling in Washington most of the rest of guardians of monetary health and the way they manage go unheeded. Judging whether an individual has done well in a job is fairly binary, but with corporate bodies and particularly central banks, such conclusion is subjective.

None more so than when casting an assessment gaze over the European Central Bank. Its challenges are unique. Trying to implement policy that finds a middle ground for the diverse economic situations playing out within the countries of the Eurozone offers not only a monetary headache but also a political one. The ECB would never admit it, but some countries curry more favour than others, their economic clout demands it. This refers to how policy setting with the most economically influential of member states is likely to be detrimental to others. During the period of September 2023 to May 2024 the ECB hiked rates to the highest level ever achieved in the bank’s history of 4.5%. This was to directly combat the soaring inflation witnessed in Germany but brought howls of derision and protest from the likes of Spain which registered a rate of 2.6% in August 2023 compared with the dominant Northern European’s 6.1%. Not only that, but until the bank continued cutting interest rates through the beginning of this year, no doubt with a possible trade war in mind, it was often accused being way too aligned with how the Federal Reserve was approaching interest rates.  

The latter charge is no longer apposite, and the ire Donald Trump feels toward the FED may be because of the easier monetary policy seen on the mainland European side of the pond. There have been eight ECB cuts since June 2024 with its US counterpart only seeing fit to cut three times since September 2024. The actions then over the last half year would be deemed a success given that it has managed to stay ahead of the decrease in inflation. Having topped out at 2.5% in January, the Euro area inflation rate stood at 2% in June, therefore, there is almost a perfect state of equilibrium between prices and interest rates. However, Christine Lagarde and her merry men, can ill-afford to sit on these ephemeral congratulatory laurels. The task now is to plot a course that manages to stave off the worst of a trade war and or, the spectre of deflation or even worse stagflation.

Any interest rate action before the level of US tariffs is established would then be folly. The spread of consequence is huge; tariffs could be between the 10% as hoped for by the Europeans and the threatening 30% as outlined in Donald Trump’s letter to Ursula von der Leyen. Jeffries analysts, noted on Reuters, speculate a 30% rate would reduce eurozone growth by around 0.5%, bearing in mind GDP growth in the first quarter of this year registered at 0.6%, the mathematics are about as unpalatable as they can be, leaving the ECB little choice this week other than to take a wait and see approach. The powerful voice of Bundesbank President, Joachim Nagel, a lifetime hawk, in an interview with Handelsblatt seen in the Morning Star, said, “a steady-hand approach” was needed, and pointing to ongoing geopolitical and trade tensions, he said their impact on inflation was “highly uncertain.” Consideration needs to be given that by cutting too early will exacerbate secondary inflation passed on to Europeans by exporters into the US. This is especially relevant if a trade war begins to hamper productivity and the ECB deploys stimulus. These variables have variables, and the issues faced by the European Central Bank will be greater than those which have been pondering here. While the ECB is enjoying a sweet spot and support from the nations that make up its membership, it has time to breathe. How quickly this state of satisfaction continues depends entirely on what tariff number the US President attaches his seismology machine, reading-like signature to.

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