Markets continue to digest the negative impact of Trump's reciprocal tariffs policy announcement, which was certainly worse than expected. Last week's performance was very negative, with major U.S. equity indexes dropping 8 to 10% and Treasury bond yields tightening by 20-30 basis points as investors looked for refuge in safer assets.
The marginally stronger Payrolls job data was largely ignored as old news. Attention has now shifted to the future trajectory of global economic growth and potential mitigating factors that could arise from negotiated deals.
Market pricing for Fed rate cuts in 2025 have increased, now ranging from 100 to 125 basis points – equivalent to four to five 25-basis-point reductions over six meetings. Whether this materializes or not, it undeniably reflects the recession fears gripping markets.
Fed Chair Powell stated last week that while tariffs will likely increase short-term inflation and lower growth, the economy remains robust overall, with a strong labor market. He noted that long-term inflation expectations remain in line with the Fed's objectives. That said, Powell indicated that they won't move rates until they get a clearer picture of the current economic challenges.
Meanwhile, stocks remain under pressure today. Asian markets session was very weak, with widespread declines in equities ranging from 5 to 12%. European stocks fell 6 to 8%, with automakers among the hardest-hit sectors. The S&P 500 is 2% lower on Monday and is down almost 20% from its mid-February peak.
The market repricing reflects growing concerns about the possibility of not just a U.S. recession, but a strong global economic downturn, as Trump continues to show little appetite for backing down on the aggressive trade tariffs. Investors are now awaiting for further trade war developments, hoping for increased support from central banks in the near future.
