GERMANY: Exports Could Fall Up To 4% In 50% US Tariff Scenario - IFO
German exports could fall by up to E60bln or around 3-4% under a 50% US tariff scenario according to IFO calculations. "A significant proportion of German export business in the USA could become unprofitable”, IFO comments.
- Note that US rhetoric on trade matters with the EU has softened since last week's 50% tariff threat by President Trump, with the threatened start date kicked back from Jun 1 to Jul 9.
- For reference, E60bln would be around 1.4% of German 2024 GDP. Initial IFO calculations following the April 2 'Liberation Day' announcements estimated a negative 0.3pp impact on German 2025 GDP (based on the 20% EU tariff rate planned then).
- Net exports added 0.9pp to quarterly GDP growth in Q1 in Germany ('Q1 Final GDP Comparatively Bright, Potential Growth Muted' - MNI, May 23) although it did follow -1.1pp drags in both 3Q24 and 4Q24, driven by a longer-term downtrend of German exports to China (in place since 2022). With a Y/Y net export contribution of -1.4pps as of Q1, the German economy remains vulnerable to a deterioration in external sector conditions.
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US TSYS: Extraordinary Measures And Cash Look Sufficient To Head Off X-Date
Treasury has about $164B in "extraordinary measures" available as of April 23 to avoid hitting the debt limit, per its regular report out Friday. That's out of a maximum total of $375B (they have used $211B).
- With Treasury cash looking healthy (around $600B), that's a fair amount of dry powder to get through the summer months to wait out the debt limit impasse. Tax receipts have looked strong with tariff revenues also starting to boost cash flows, further reducing the near-term urgency to adjust bond issuance.
- This has also helped push back analyst “x-date” expectations to later in the summer/September. We expect to hear from Treasury about its own x-date assumptions next week.
US TSYS: Treasury Market Trading Stayed Orderly In April: Fed Report
Liquidity across financial markets including the Treasury market deteriorated after President Trump's April 2 reciprocal tariffs announcement but market functioning was generally orderly, according to the Federal Reserve's semiannual report on financial stability, released Friday. (PDF link is here)
- Treasury market liquidity has been poor for years and yields were particularly volatile in early April, contributing to a deterioration in market liquidity, the Fed said.
- Nevertheless "trading remained orderly, and markets continued to function without serious disruption," according to the report, which looked at information available as of April 11.
FED: Ex-Gov Warsh: Fed Has Failed To Satisfy Price Stability Remit
From our Washington Policy Team - Some fairly sharp words today from ex-Fed Governor Warsh on the central bank (who for what it's worth is seen by betting markets as by far the frontrunner for the next Fed Chair):
- The best way for the Federal Reserve to safeguard its independence is for policymakers to avoid expanding the institution's role over time, including wading into policy areas that are outside its core mission, former Fed Governor Kevin Warsh, a leading contender to replace Jerome Powell as chair next year, said Friday.
- "I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed," Warsh said in a speech at a Group of Thirty event on the sidelines of the IMF meetings. "Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending." His speech made no mention of Trump's tariffs or the appropriate monetary policy to deal with them.
- He said the ideas of data dependence and forward guidance widely adopted by Fed officials are not especially useful and might even be counterproductive.
"We should care little about two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing data from stale national accounts -- subject to significant, subsequent revision -- is evidence of false precision and analytic complacency," he said.
"Near-term forecasting is another distracting Fed preoccupation. Economists are not immune to the frailties of human nature. Once policymakers reveal their economic forecast, they can become prisoners of their own words. Fed leaders would be well-served to skip opportunities to share their latest musings."
