US uncertainty, German elections top global market news

Last week brought a range of developments for investors to watch, including acknowledgements of uncertainty during corporate earnings calls, questions about US government cost-cutting, pessimistic US consumer survey results, and German election results that could be a positive catalyst for European equities.

Meeting minutes illustrate Federal Reserve concerns about inflation

As expected, the minutes from January’s Federal Open Market Committee (FOMC) meeting showed that officials were ready to hold interest rates steady until further improvement on inflation. This is the “wait and see” message that Chair Jay Powell shared during the press conference in January:

“Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.”¹

It's clear from the minutes that a resurgence in inflation is considered a not insignificant risk because of Trump administration policies: “Participants generally pointed to upside risks to the inflation outlook. In particular, participants cited the possible effects of potential changes in trade and immigration policy.”²

The key takeaways from the minutes were echoed by various FOMC members last week:

• Fed Governor Michelle Bowman said she’d like to see more data showing progress on inflation before cutting rates further: “There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to gain greater confidence that progress in lowering inflation will continue as we consider making further adjustments to the target range.”³
• Fed Governor Christopher Waller shared, “If this wintertime lull in progress is temporary, as it was last year, then further policy easing will be appropriate. But until that is clear, I favor holding the policy rate steady.”⁴                                                                                       

Walmart earnings report highlights economic and consumer uncertainties

Walmart released its earnings for the fourth quarter, and while the company handily exceeded earnings expectations, investors were disappointed by its outlook.

While Walmart was not pessimistic, it was realistic. Walmart’s chief financial officer acknowledged that there is a lot of uncertainty this year in terms of policy (primarily tariffs) and that consumers’ wallets remain stretched: "We have to acknowledge that we are in an uncertain time. And we don't want to get out over our skis here. There's a lot of the year to play out.”⁵

Walmart made it clear that its outlook “assumes a relatively stable macroeconomic environment” but acknowledges “that there are still uncertainties related to consumer behavior and global economic and geopolitical conditions.”⁶ This was enough to worry already-jittery markets and contribute to a sell off (from Feb. 20 through Feb. 24, the S&P 500 Index was down 2.62% and the NASDAQ Composite Index was down 3.84%, according to Bloomberg).

US survey shows falling consumer sentiment and rising inflation expectations

We got the worst of both worlds with the latest University of Michigan Survey of Consumers, which showed that US consumer sentiment is down and consumer inflation expectations are up:

• One-year ahead consumer inflation expectations were 4.3% in February, which is up dramatically from 3.3% in January.
• Five-year ahead expectations also rose – but more modestly -- to 3.5%, up from a preliminary 3.3% and surpassing January's reading of 3.2%. However, it is worth noting that five-year ahead expectations are at their highest level since 1995.⁷
• Consumers expressed concern about multiple economic factors for the year ahead:
• More than 50% of those surveyed expect unemployment to rise in the coming year, which is the highest percentage since the pandemic recession.
• Consumers’ outlook for their personal finances broadly declined in February. More than 50% of consumers expect their incomes to rise, but only 16% expect their income gains to outpace inflation.⁸

These results increase the possibility of a stagflationary environment ahead, although I believe that remains a low probability scenario.

DOGE’s approach to cost-cutting sparks concerns about economic impacts

I had the opportunity to speak at a conference last week; afterwards, I was able to talk with a number of individual investors in the US. I thought there would be more positivity around the Department of Government Efficiency (DOGE) and its efforts to reduce federal government spending. While there were certainly some who were thrilled with the amount of progress that the DOGE team seems to have made, I was surprised to hear significant concerns. Those concerns are twofold:

• Will such a big drop in government spending, including firing federal employees, negatively impact the US economy? 
• Will we actually see a big reduction in the fiscal deficit?

In terms of the first question, it seems likely that these firings, given the speed and scale at which they seem to be occurring, could trigger the Sahm rule — a recession indicator that states the US is in the early months of a recession when the three-month moving average of the US unemployment rate is at least 0.5 percentage points above its 12-month low.

Recall that Powell said at his last FOMC press conference that the hiring rate is low, so a significant increase in layoffs would cause unemployment to go up quickly. There was real concern that layoffs plus a large drop in government spending could create serious economic headwinds that could even result in recession.

With regard to the second question, I admit it is concerning from a deficit perspective to hear that the administration is considering giving 20% of DOGE’s savings as a payout to Americans — which could total as much as $5,000 a person assuming that DOGE achieves its goal of $2 trillion in savings. To have the biggest impact on the deficit, those DOGE savings need to pay for anticipated tax cuts — and help bring the federal budget into better balance.

I also got questions about the Internal Revenue Service (IRS): If the government is firing so many IRS agents, how are they collecting the revenue that’s needed to balance the budget?  And then there were jitters about the firings and re-hirings of nuclear scientists and health officials working on the avian flu, as well as adequate staffing of air traffic controllers.

It seems that while many believe the federal government is bloated and cost savings could easily be found, some don’t seem to like the instability that is coming with the current approach. I suspect this concern could at least be partially contributing to the market jitters we have witnessed in recent days.

German election results could be a positive catalyst for European equities

Last weekend’s German election was a critical one for Europe, especially in light of the US’s seeming abandonment of its alliance with Europe. This is probably the most market-friendly result we could have hoped for: a clear win for Friederich Merz, of the center-right CDU/CSU party.

CDU/CSU is not a fringe party, and Merz will not be a fringe leader. He is widely respected, is likely to be business-friendly, and is expected to take a commonsense approach to some of his country’s biggest problems – he’s hopefully just what the doctor ordered for Germany.

The far-right AfD party got the second-largest number of votes but fell short of what many pundits feared in terms of votes. This clears the way for a grand coalition of “center left” and “center right” – which would serve to hold the political firewall against fringe parties.

Merz seems to have the gravitas to lead Germany and help lead Europe as it charts a new course away from the United States. I’ve written before about the attractiveness of European equities – this election could be another important positive catalyst for European equities this year.

Financial terms to watch

In a previous column, I introduced some new financial terms for a new year. It's time to add another new term to the lexicon and refresh some old ones.

Mar-a-Lago Accord. This is an unofficial proposal that has just emerged in recent days which could substantially help the US’ fiscal position. You may recall that the Plaza Accord of 1985 was essentially an agreement to devalue the US dollar to help the US’s trade position (in essence, putting a thumb on the scale of the free market). In the spirit of the Plaza Accord, the new Mar-a-Lago Accord could also help achieve the US’s goals – this time dramatically altering America’s debt composition by forcing some of the US’s foreign creditors to swap their Treasury holdings into ultra long-term bonds (reported to be 100-year, non-tradeable zero-coupon bonds) to ease the US’s debt service burden. This is an interesting idea that deserves contemplation, although I suspect foreign investors would be very unhappy with such a debt trade. There are other components to the plan, such as quietly weakening the US dollar to narrow the trade deficit, but this is the most unique and consequential.

Stagflation. This term has long been used to characterize a period of high inflation, low or no growth and high unemployment. We’re a long way from a stagflationary environment, but the term should get renewed attention in light of the newest University of Michigan Survey of Consumers. That survey, along with other recent data, indicates that the risk of stagflation is not zero as consumers worry about a resurgence in inflation and a slowdown in the economy.

Sovereign wealth fund. Again, this is an old term that’s getting new life. A sovereign wealth fund is a state-owned investment fund that serves as an “endowment” for a country. Many countries with significant natural resources have created sovereign wealth funds in which to place the wealth derived from these resources as they deplete them; it is considered a way to replace their natural endowment with a financial endowment. The Trump administration has announced plans to create a sovereign wealth fund for the US (the biggest question is where the money would come from to fund it – both tariff revenue and money received from the sale of public lands have been suggested as possible sources). While this is certainly a non-mainstream idea for America, I like the out-of-the-box thinking and hope it could result in more out-of-the-box thinking — like investing a portion of Social Security retirement funds in equities, which could arguably help them last longer and may offer a better retirement income for Americans.

Looking ahead

This week we will see a lot of important data releases, but none seems more important than the US Personal Consumption Expenditures (PCE) print on Friday. Core PCE is the Fed’s preferred inflation gauge, so it will be keenly watched by a Fed that is taking a cautious approach and wants to see further progress on disinflation before it acts.