12. 5. 2025 - Josef Brynda
Today, May 12, 2025, the United States and China announced a significant agreement to reduce tariffs for a 90-day period, marking a major step toward easing tensions in the ongoing trade conflict.
Key Points of the Agreement:
Market Reaction:
Background:
Outlook:
While seen as a positive step, analysts caution that this is only a temporary measure. Structural imbalances and deeper strategic issues remain unresolved. The next three months will be critical in determining the future of U.S.-China trade relations.
24. 4. 2025 - Josef Brynda
During his time in politics, Donald Trump repeatedly expressed, and the media frequently highlighted, his intent to lower the value of the U.S. dollar. His logic was straightforward: a weaker dollar improves the export competitiveness of the United States and simultaneously reduces the real cost of repaying U.S. government debt denominated in dollars. At first glance, it may seem that he has succeeded, indeed, the dollar weakened during certain periods.
However, the situation is far more complex. In June of this year, the United States faces a significant government bond repayment, where the effects of a weaker dollar were theoretically expected to be most apparent. Yet one crucial factor that Trump either overlooked or failed to influence in the long term is the yield on U.S. Treasury bonds.
While the early stages of his leadership saw a decrease in Treasury yields, the second half of his current term has been marked by a sharp rise in those yields. This increase has significantly raised the cost of servicing the national debt, regardless of whether the dollar is weak or strong. When yields rise, both new bond issuances and refinancing of existing debt become more expensive for the government.
Inflation and the Fed’s Response: A weaker dollar contributes to inflation by making imported goods more expensive. In response, the Federal Reserve has adopted a hawkish monetary stance, which further drives up bond yields and complicates debt management.
Investor Confidence: Rising yields also reflect a loss of investor confidence in the long-term fiscal stability of the United States. The weak-dollar policy may be perceived as short-term populism, but from a macroeconomic perspective, it is risky.
Dollar Weakness vs. Geopolitical Stability: A declining dollar undermines the international status of the U.S. dollar as the world’s primary reserve currency, which over time reduces the U.S. government’s ability to finance deficits more cheaply than other nations.
Trump’s attempt to weaken the dollar may have provided short-term benefits for exporters. However, when it comes to managing national debt, the strategy appears insufficient. In fact, rising Treasury yields may have the opposite effect, increasing debt servicing costs, boosting inflationary pressure, and raising credibility risks for the U.S. economy.
15. 4. 2025 - Josef Brynda
In recent days, we have witnessed developments in financial markets that often contradict traditional economic models. A typical example is the aftermath of the start of trade wars many economists assumed that the imposition of tariffs would lead to a strengthening of the domestic currency. The logic was simple: higher prices for foreign goods would reduce demand for them, while demand for domestic production would rise. This should mean less pressure to exchange domestic currency for foreign currency and an improvement in the trade balance. However, reality often shows a different outcome.
Let’s imagine that you plan to produce 50 cars in 2025, which is 10 more than last year. With this growth plan, you approach investors, who appreciate the ambition and provide capital. However, if import tariffs cause costs to rise, you might be able to temporarily increase prices and benefit from higher demand for domestic products, but the situation can quickly change. If foreign partners respond with their own tariffs, the entire plan may collapse. Modern economies are highly interconnected, and final products often consist of components from various parts of the world. History shows that trade wars have no clear winners.
Investors support companies with a clear and stable plan. However, if a company frequently changes its strategy, investor confidence drops, and they begin seeking safer investments. This doesn’t apply only to companies, but to states as well. If investors lose trust in a country's fiscal policy, they begin selling off its bonds, which can lead to financing issues. An example is the United Kingdom in 2022, when a loss of investor confidence led to a sell-off of government bonds and market turbulence.
For an economy like the United States, which heavily relies on debt, the loss of investor trust is particularly risky. For instance, China, one of the largest holders of U.S. government bonds, has apparently begun selling them off in large volumes. According to economic models, it should still be profitable for China to hold on to these bonds, higher interest rates in the U.S. should make them attractive. However, if political decision-making prevails over economic logic, models stop working because their fundamental assumptions (stability, rational behavior) no longer hold true.
Economic models are neither outdated nor flawed. Their problem lies in being built on certain assumptions, such as a stable environment, rational behavior of actors, and predictable policy. If these assumptions stop being valid, the models no longer reflect reality. The greatest risk of today’s world thus doesn’t lie in the models themselves but in the fact that the world they aim to describe is becoming increasingly unpredictable and unstable.
Overall, it will be very interesting to watch how the situation unfolds. If the U.S. dollar is to remain a safe haven, the United States must issue a strong statement outlining a clear plan and improving trade conditions. Continued chaos could further discourage investors from holding American assets.
8. 4. 2025 - Josef Brynda
Is modern economics returning to the days of mercantilism? Has Adam Smith been forgotten?
In an era marked by rising geopolitical tensions, disrupted supply chains, and mounting pressure to protect domestic markets, these questions seem more relevant than ever. Voices calling for tariffs, import restrictions, and economic self-sufficiency are growing louder – even at the cost of higher expenses and reduced efficiency. It all sounds familiar. As if we were stepping back into the 16th to 18th centuries, to a time when a nation’s wealth was measured by the amount of gold in its treasury and economic policy revolved around tight trade controls.
Mercantilists believed that prosperity stemmed from a positive trade balance – exporting more than importing. States supported exports, imposed tariffs, and discouraged foreign imports to "keep wealth within." Yet this logic often led to market distortions, reduced competitiveness, and stagnation in innovation. And today, in the 21st century, similar strategies are once again being adopted. How else can we describe the reciprocal tariffs between the U.S. and China if not as a return to the principles that Adam Smith so strongly criticized?
It was Smith, the Scottish philosopher and economist, who revolutionized economic thinking in 1776 with his landmark work The Wealth of Nations. He argued that real wealth lies not in hoarding precious metals, but in productivity and the freedom of exchange. Free trade, division of labor, and comparative advantage – where each nation specializes in what it does best – increase overall prosperity. His ideas laid the foundation for classical liberal economics and inspired the economic policies that fueled unprecedented growth in the 19th and 20th centuries.
Yet today, economic rationality seems to be fading once again. Instead of embracing open markets, governments turn to "protecting domestic industries," "ensuring strategic independence," or "defending national security." In reality, this often leads to higher consumer prices, limited choices, and disruption of the flows that modern economies depend on. In trying to protect local industry in the short term, long-term economic health may be sacrificed – a lesson history has already taught us.
Perhaps we truly have forgotten Adam Smith. Or perhaps economic decisions are once again being held hostage by populist moods and political grandstanding. But that is exactly why his ideas deserve renewed attention – not as dogma, but as a framework for maintaining stability and prosperity in a deeply interconnected world. The question is not merely whether free trade works. The question is whether we are willing to uphold its principles even in times of uncertainty.
So what would actually happen if a tariff truce really came into effect?
After all, we saw a glimpse of this just yesterday, when a report surfaced – now known to be fake news – suggesting that a 90-day tariff truce was being planned. At the time, however, the information seemed credible, and U.S. indices reacted immediately and positively. For instance, the S&P 500 reversed within minutes from a loss of around -3.5% to a gain of approximately +3.5%, clearly showing how sensitive markets are to any sign of easing trade tensions.
Moreover, lifting tariff measures could reopen some of the disrupted trade channels and thereby reduce – as Adam Smith already described – forced cost components. In other words, artificially created barriers that distort the natural flow of goods and services. It's also important to point out that, in today’s context, where the world’s largest economy is facing a potential recession due to the trade war – with Goldman Sachs putting the odds at up to 45% (Reuters, 2025-04-07) – this becomes a serious issue for the central bank as well.
While the Fed today is relatively well equipped to deal with consumer-driven (demand-pull) inflation through interest rate hikes, cost-push inflation presents a much trickier challenge. The economy may be operating below its potential output, yet price levels are still rising. In such a moment, the central bank faces a dilemma between two evils: either sacrifice price stability in favor of low interest rates to support growth, or sacrifice economic output by raising rates to fight inflation, even at the cost of slowing the economy further.
Another major risk – and certainly not a minor one – is the unpredictability and chaos in the implementation of trade policies. In recent days, it has practically become a routine for the U.S. administration to treat tariffs like a light switch – imposed today, repealed tomorrow, recalculated the day after based on some mysterious formula that lacks both logic and economic rationale. This inevitably creates an environment of uncertainty, where companies are unable to plan ahead. And failing to meet financial targets can cost firms not only in terms of stock market losses but also investor confidence.
This raises a fundamental question: Could this chaos ultimately drive American companies to leave the country, rather than attract foreign firms back to the U.S., as Donald Trump originally intended?
Historically, trade wars have never had real winners. For us economists, such a move in today’s world is truly perplexing – and at times even absurd.
So should we fear that modern economics is turning its back on principles that were long ago disproven?
7. 4. 2025 - Josef Brynda
The report that President Donald Trump is considering a 90-day pause on tariffs could have an immediate positive impact on global financial markets. Investors may interpret this move as a signal of easing trade tensions, which have significantly influenced international trade and stock market performance in recent years. Stock indices such as the S&P 500 or Nasdaq could experience gains, as markets tend to respond sensitively to any signs of improvement in trade relations between the United States and other countries.
After the announcement, we saw gains in the S&P 500, but those gains were later erased. Many would assume this should be a clear relief for the market, but in today's environment — and given the mood of investors who are extremely cautious about such statements — things are different. This is especially true considering the White House tends to change its messaging from minute to minute. The key will be to watch what this afternoon brings.
On the financial markets, this could — I emphasize could — be a positive sign for the USD. A statement like this might delay expectations for the Fed to start cutting interest rates, which have recently been lingering in the air and were, to some extent, already being priced in by investors.
One of the major problems with a trade war — aside from the current situation that creates overall uncertainty — is the rising input costs for businesses. In response to that, the Fed might normally consider cutting interest rates to alleviate the rising costs for businesses and thereby potentially support economic growth. However, tariffs are precisely the kind of tool that pushes prices higher, and in that case, the Fed tends to react with a more hawkish stance — that is, by tightening monetary policy rather than easing it. In such circumstances, a rate cut would likely not be on the table.
So the big question these days is whether the Fed will prioritize price stability or instead choose to favor economic and monetary support.
26. 3. 2025 - Josef Brynda
As we mentioned earlier, fears of a recession in the U.S. appear to be somewhat overblown. Today's data showed that durable goods orders are near record highs this year, indicating strong consumer and business demand. At the same time, the labor market remains stable and resilient.
A key factor in confirming this positive trend will be tomorrow’s GDP data, which could provide a clearer picture of the overall health of the U.S. economy. Another supportive signal comes from Donald Trump's statement regarding reciprocal tariffs, which are set to be more specifically targeted at selected segments on April 2. This move could help ease concerns about escalating trade disputes and, in turn, reduce fears of a recession.
Overall, despite some uncertainties, economic data continues to point to solid fundamentals that should prevent a significant slowdown in economic growth.
19. 3. 2025 - Josef Brynda
The dollar strengthened against major global currencies this morning in anticipation that interest rates will remain unchanged, according to CME Group. Its strength was also supported by weaker-than-expected data from the eurozone regarding the consumer price index. On the other hand, the approval of the stimulus package did not provide significant support to the euro, possibly because the Greens are demanding that part of the planned fund be invested in environmental innovations, which investors in Europe often perceive as a negative factor.
At the same time, yesterday's data from the U.S. almost ruled out concerns about a current recession, as industrial production showed a growth of around 0.7%. Additionally, labor market data also indicate stability. Overall, it can be said that U.S. fundamental data remain strong, but investor sentiment has been unsettled due to the unpredictability of government policy. The foreign exchange market is currently experiencing ideal yet often difficult-to-predict movements.
As I mentioned earlier, it will be crucial to follow Jerome Powell’s speech today at 19:00, where he will comment on the current and future economic outlook. Based on observed data, it can be assumed that Powell will not rush into further rate cuts this year, and we rather expect only two reductions, provided that the economy demonstrates resilience. These cuts could then lead to a neutral interest rate.
However, more than ever, it is now essential to monitor investor sentiment. Market sentiment has recently pushed the euro up by approximately 5% against the dollar.
18. 3. 2025 - Josef Brynda
Today, March 18, 2025, an extraordinary session is taking place in the German Bundestag, where lawmakers are debating a comprehensive financial package aimed at strengthening defense and investing in infrastructure. This package includes a reform of the so-called debt brake, a constitutional measure limiting the country's debt, with the goal of enabling higher defense spending. The proposal has been put forward by the parties of the likely new governing coalition, the conservative CDU/CSU alliance and the Social Democratic Party (SPD), and they are also negotiating support with the Green Party.
The proposal includes the creation of a €500 billion investment fund, which would be used for infrastructure modernization, such as roads, railways, and energy networks. This fund would be financed through loans, which requires an amendment to the existing debt brake. A two-thirds majority in parliament is needed to approve these changes, which is why intense negotiations with other parties are taking place.
The future chancellor, Friedrich Merz, has emphasized the necessity of this step in response to current geopolitical threats and the need to strengthen the defense capabilities of Germany and Europe. He also pointed to the weakening alliance with the United States under President Donald Trump, which increases the need for European defense autonomy.
We can say that if German debt leads to economic growth and higher inflation, the ECB may raise interest rates. Higher rates attract investors and strengthen the euro. Additionally, capital inflows into Europe and expectations of increased demand can further push the euro higher.
25. 2. 2025 - Josef Brynda
German elections
The German elections were won by the conservative CDU/CSU union with 28.52% of the vote. The far-right party AfD finished second with a record result of 20.8% and expressed its ambition to co-shape political developments in Germany. However, the winning party firmly rejected this possibility.
AfD, together with the left-wing party Die Linke, secured what is known as a blocking minority, which could enable them to obstruct CDU/CSU’s planned reforms on the debt brake and military modernization. This suggests that negotiations will be complex.
Following the election results, the euro initially strengthened against the dollar by up to 0.7% in anticipation of responsible fiscal policies. However, the subsequent weakening of the euro was likely caused by uncertainties surrounding coalition negotiations and the potential blocking minority formed by AfD and Die Linke.
Coalition talks are expected to take place primarily with the SPD, with whom the CDU/CSU collectively secured 328 seats out of 630. Merz, the incoming chancellor, is striving to expedite negotiations as much as possible to prevent political stagnation.
German economy
While elections took place in Germany, the country’s economy continues to struggle. According to the latest GDP data, economic output declined by 0.2% in the fourth quarter of 2024, confirming a second consecutive year of economic contraction. Forecasts for 2025 predict growth of just 0.3%, significantly lower than the initial estimates.
The main issues include an industrial slowdown, particularly due to high costs in the automotive sector, as well as the ongoing war in Ukraine, which has led to higher energy costs. Additionally, weak consumer confidence remains a challenge, as stagnating wages continue to impact the labor market.
12. 2. 2025 - Josef Brynda
The latest inflation data for the USA has just been released. The actual figures were higher than expected, which led to a nearly 1% strengthening of the USD compared to today's local high. The data suggests that the Federal Reserve (FED) may continue tightening monetary policy, as accelerating inflation poses a risk to long-term price stability. At the same time, with the US imposing tariffs that create pro-inflationary pressures, the FED may not be in a hurry to take further action.
This trend could lead to parity between EUR and USD, which is no longer an entirely unrealistic target. Such a development could be disadvantageous for American exporters. Additionally, rising inflation could negatively impact US stock markets, which may report lower results this year due to the potential for stricter policies from the central bank. These conditions could limit opportunities for domestic companies, potentially driving investors towards safer assets.
Given these findings, it will be crucial to watch Jerome Powell’s speech today, as it may provide insight into the future direction of monetary policy, with expectations leaning towards a more hawkish tone.
Overall, both sentiment and fundamental analysis suggest that under these conditions, the USD should remain strong, while the stock market could be paralyzed by these data.
