U.S.-EU trade deal means uncertainty is "forgotten but not gone," BofA says

Investing.com - A weekend trade deal between the United States and European Union could help reduce economic uncertainty in the near term, but is unlikely to eradicate it altogether, analysts at BofA Securities have argued.

Washington and Brussels reached a landmark trade agreement on Sunday that includes a 15% tariff on EU goods entering the U.S. The tariff applies to a wide range of items, including semiconductors and pharmaceuticals. However, there are some exceptions, such as a 50% levy on steel and aluminum that will remain in place.

In a note on Monday reacting to the announcement, the BofA analysts led by Aditya Bhave said the agreement is "unstable" and warned that the murky outlook is "forgotten but not gone."

"[D]etails are not agreed, commitments made need to be backed by individual countries, and, more importantly, to us the deal shows that when the EU is cornered, it lacks the agility and strength to negotiate strategically," the brokerage wrote.

The broad-strokes deal encompasses significant EU purchases of U.S. energy and military gear, along with substantial investments in the American economy.

U.S. President Donald Trump said the European Union has committed to purchasing $750 billion worth of energy from the United States. He also stated that the EU has agreed to make $600 billion in investments in the U.S.

"They are agreeing to open up their countries to trade at zero tariff," Trump told reporters. He added that the EU would "purchase a vast amount of military equipment" from the U.S.

European Commission President Ursula von der Leyen confirmed the agreement would include 15% tariffs across the board, noting that this measure would help "rebalance" trade between the two major trading partners. Of the $3.3 trillion in goods imported by the U.S. last year, more than $600 billion came from the 27-member EU.

The pact could help bring some calm to investors, who had been wary that both sides could fail to reach a deal before August 1, when Trump’s sweeping "reciprocal" tariffs are due to come into effect. The EU had been facing heightened levies of 30%, and had reportedly been pushing for a zero-for-zero agreement with the White House.

But the BofA analysts described the pact as "bad" for Europe’s economy, saying that, depending on its final form, the average tariff rate the EU will face on exports to the U.S. will likely be around 15% -- up from about 1% just last year. BofA estimated that, over the "next few quarters," roughly 15 to 20 basis points of the bloc’s gross domestic product could be at risk because of the deal.

Meanwhile, for the U.S., the accord "reduces uncertainty" around its relationship with its biggest trading partner, the analysts said. Yet they warned that, as the effective tariff rate on the EU has approximately doubled, inflation in the U.S. could be boosted by 10 basis points -- "and substract a similar amount from growth."

"As we await potential agreements with other countries, it appears that the average tariff rate could land closer to 15%, compared to our base case of 10%," the BofA analysts said. "We see rising risks that the inflation shock could be more protracted than initially expected, extending deep into next year[.]"

As a result, there is "all the more the reason" for the Federal Reserve -- which has cited tariff-fueled wariness around the broader economic outlook as a motive for their decision to recently adopt a wait-and-see attitude to future interest rate changes -- to "remain patiently on hold," the analysts said. The Fed is tipped to leave interest rates unchanged at a range of 4.25% to 4.5% at the end of its latest two-day meeting on Wednesday.