Stop Moralising / Interpreting Latest Data / Inflation And Growth Perspective

Good Morning Ladies and Gentlemen

”Don’t gamble; take all your savings and buy some good stock, hold it until it goes up, then sell it. If it doesn’t go up, don’t buy it.”

Will Rogers

Europe’s difficult situation is home-made, and I think humanity is currently engaged in a significant experiment. Because in the Western world, particularly within “reasonably” liberal democracies, we lack a scientific control group. This absence stems from our collective deference to the directives of the American government, given its economic and military power, which is a somewhat understandable situation. Nevertheless, it leaves us without a means to discern our circumstances if we do not submit to these influences. However, at some point, I believe, Europe must cultivate a culture of debate that allows individuals to express opinions that may not align with the prevailing and often left-wing mainstream. The ongoing moralising and emotionalising of discussions is detrimental to the political discourse and seriously represents one of many fundamental challenges.

The U.S. Labour Market

Overall, tension in the U.S. labour market is rising, although it has not yet indicated a recession. Concurrently, the U.S. economy is experiencing a slowdown, as evidenced by the labour market data for July and the ISM services index. Initial jobless claims in the US increased from 218’000 to 226’000, while continued claims surged to 1.97 million, a new record high.

The Fed – Was I Wrong?

Some two weeks ago, I wrote: “So, if you seek my two cents on the matter, I believe it is reasonable to expect that the Federal Reserve will make no policy changes for the remainder of the year. As a result, I would not be surprised if interest rates remain unchanged during this period.” Given the context of the U.S. labour market and the Fed’s dual mandate addressing inflation and employment, I must admit that the likelihood of interest rate cuts is rising. The current US key interest rate range lies between  4.25% to 4.5%. Until yesterday morning, there was a strong possibility that the Fed would decrease its key interest rate by 25 basis points in September and even at the following meetings in October and December. Futures traders anticipated more key interest rate cuts by the end of 2026, namely in September, October and December 2025, and two more in April and July 2026. The latest numbers clearly show that the tariff war’s impact on the consumer side of inflation remains limited in July, with US inflation remaining at 2.7%. However, core CPI inflation rises to 3.1%. It is essential to acknowledge, Ladies and Gentlemen, that we are not exempt from the possibility of forecasting inaccuracies, i.e. (and it is not that I like to admit it) we are also prone to prediction errors.

Prediction Error: A Quick Definition

Prediction error is the difference between expected outcomes and real events. This process acts as a mechanism by which the brain maintains a cognitive record, constantly comparing its predictions with incoming sensory information. Consequently, it enables the ongoing improvement of internal models, supporting adaptive responses to the environment.

Not So Fast, Look At The PPI

However, yesterday’s unexpectedly substantial price increases among U.S. producers may indicate the tariff war’s initial effects on inflation. In July, producer prices in the United States surged by 3.3% year-on-year, following a 2.3% increase in June; economists had only anticipated a 2.5% rise for July. This development immediately tempered expectations for a swift interest rate cut in the world’s largest economy, which had previously been supported by the above-mentioned subdued consumer price inflation data released earlier in the week. Now, the latest and higher producer prices may lead to higher consumer price inflation, and higher consumer price inflation limits the possibility of interest rate reductions that the stock market had been speculating about recently. In short, it will stay interesting and higher market volatility may be expected.

Reduced Growth Prospects Using Germany as an Example

The outlook seems quite bleak when assessing European growth prospects through the lens of Germany. The ZEW Index highlights a troubling economic situation for Germany in August, with a significant drop from -59.5 to -68.6 points. This decline has effectively interrupted the tentative recovery that had been underway. Additionally, economic expectations have sharply fallen, plummeting from 57.7 to 34.7 points. After several months of improvement, it is clear that the 15% import tariff imposed by the U.S. on EU countries is beginning to affect the economy. Excluding the recovery following the coronavirus crisis in 2021, the German economic landscape has been negative since 2019, reaching a record low that surpasses 2002 to 2006, when Germany was often referred to as the ‘sick man of Europe.’ Overall, the prospects emerging from the world’s third-largest economy are not particularly encouraging.

Conclusion

We are now entering a critical phase regarding the initial effects of the tariffs imposed by the Trump administration on global trade. This situation extends beyond merely the absolute level of tariffs; it also encompasses the non-binding nature of agreements and arrangements, along with a noticeable departure from established global trade norms. Without passing any judgments, we will be able to assess the implications for the United States and other nations within the next few quarters, or at most, in a few years. It is important to note that during uncertain times like these, businesses and individuals tend to trim investments, which will likely negatively affect global growth and employment rates.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li