by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest vague promise by the Chinese government to boost consumer spending and spur economic growth. We next review several other international and US developments with the potential to affect the financial markets today, including a planned move by the European Union to make its fiscal policy more flexible and supportive of growth and the latest US import tariffs announced by the White House.

China: At a meeting yesterday, the State Council again said it would prioritize raising consumers’ income and consumption spending to spur economic growth. However, as in the past, the officials gave no details, which suggests the government remains ideologically opposed to a major new stimulus program. Some new spending programs are likely to be unveiled at the March legislative meetings, but we don’t expect them to be aggressive enough to overcome China’s increasingly difficult structural barriers to growth.

European Union: The European Commission is reportedly planning a major revamp of its next multi-year common budget, which begins in 2028. The plan would consolidate the dozens of different spending programs in the current budget to just three funds. The first would operate similar to a block grant, giving recipient countries wide flexibility in how to use the funds. The second would provide money for competitiveness and investment, while the third would provide funding for administration, foreign policy, and defense.

• The proposed structure is apparently how the Commission plans to get around the member countries’ disagreements over new challenges, such as common debt financing and increased defense spending.
• However, the plan is not yet set in stone, and it is still not certain if it will ultimately be approved.

France: Illustrating how trade tensions can crimp exports, industry association data shows that French wine and spirit shipments abroad fell approximately 4% in 2024 to 15.56 billion EUR ($16.04 billion). Exports to the US grew, especially for wine, but the overall total was held down by weak shipments to other countries. Importantly, shipments to China were down because of an antidumping probe that Beijing launched to retaliate for the EU’s dumping probe into Chinese electric vehicles.

US Monetary Policy: Federal Reserve Chair Powell starts his semi-annual testimony to Congress today with an appearance before the Senate Committee on Banking, Housing, and Urban Affairs at 10:00 AM ET. Naturally, investors will be looking for any clues on the future path of interest rates and how many rate cuts there might be in 2025. We will also be looking for how the Fed is thinking about the new administration’s tariffs and other economic policies. Powell will also appear at the House Committee on Financial Services tomorrow.

US Fiscal Policy: The federal judge who issued the January 31 restraining order against the Trump administration’s effort to freeze federal spending on diversity and other programs yesterday issued a new order demanding that the administration implement the first order. The new order responds to a suit by 22 states and the District of Columbia alleging that the administration has not yet unfrozen the affected funds.

• Another report by the Washington Post yesterday said some farmers are not receiving funds promised under the Biden administration’s Inflation Reduction Act, despite Trump’s assurances that his spending freezes would not affect individuals.
• The developments provide further evidence that the Trump administration intends to be aggressive about withholding even outlays approved by Congress. That increases the risk of an eventual constitutional crisis over presidential and Congressional powers.
• In addition, if the administration impounds large amounts of the federal budget, the sudden fiscal contraction could spark an economic slowdown or even recession. If government contractors, employees, or other firms or individuals sense that federal payments can no longer be taken for granted, they are likely to slow their spending. In turn, that could weigh on economic activity, boost bond values, and hurt stocks.

US Trade Policy: As expected, President Trump last night ordered tariffs on all US imports of steel and aluminum, including finished metal products, to be effective in early March. The new duties will be on top of the 25% levies on Canada and Mexico that are currently paused, the new 10% tariffs on goods from China, and the president’s upcoming reciprocal duties on other nations. As we noted in our Comment yesterday, the blanket nature of the steel and aluminum tariffs suggests the administration may not be inclined to offer exemptions to them.

• In response, the European Union today said it would respond to the new US tariffs with “firm and proportionate countermeasures.”
• EU member states have already approved retaliatory tariffs of up to 50% on 4.8 billion EUR ($4.96 billion) of US imports and could quickly take a final vote to impose them. The products affected could include bourbon whiskey, Harley-Davidson motorcycles, motorboats, and some US-produced steel and aluminum.

US Labor Market: In its March cover story, The Atlantic magazine highlights how high housing prices, mortgage rates, and other factors have sharply reduced many US residents’ ability to move to other locations to take advantage of better job opportunities. The article calls the fall in labor mobility the US’s “single most important social change of the past half century.” It also claims that only the affluent and well-educated seem exempt from the phenomenon.

• If affluence and a good education really have become the requirement for labor mobility, the phenomenon would probably help explain the rise of populism in the US over the last couple of decades.
• If the situation is not improved, it would also suggest that many stagnating states and communities could continue to struggle, holding back economic growth and fueling even more resentment toward elites, politicians, and government in general.

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