U.S. government bonds (treasuries) fell in price as investors required higher yields. A 20-year auction (government sale of bonds to investors) saw weak support and a bump up in yields, adding to U.S. borrowing costs.
The rapid expansion of U.S. government debt, which has accelerated in recent years, has started to cause ructions in the bond markets. U.S. President Donald Trump’s administration has helped craft a tax and spending bill that’s currently under negotiation in Congress. The bill narrowly passed the House of Representatives by a vote of 215 to 214 and is widely expected to increase the federal budget deficit. It still has to pass the Senate, which may require more changes, to become law.
As it stands, the deficit increase is largely mitigated by tariff income, but this is controversial because tariff income doesn’t reflect current legislation; instead, it stems from executive emergency powers with an implication that it should be temporary in nature (although seems likely to remain in place).
Ultimately, Congress can convince itself that tax cuts can pay for themselves through higher growth, but the bond market is more objective. More issuances seem to be driving the increase in bond yields.
Bond vigilantism occurs when the bond market sells off and borrowing costs rise in response to the government seeming to want to pursue unsustainable policies. It ended Liz Truss’s premiership in the UK, and it may have prompted President Trump to reverse course on his ‘Liberation Day’ tariffs.
One of the inconsistencies of the new trade policy is that by discouraging trade with the U.S., President Trump’s also discouraging the use of the dollar as the world’s reserve currency and, in doing so, is making it less important for foreign investors to lend to the U.S. government. This has led to a decrease in demand for U.S. treasuries at a time when the government wants to borrow more and therefore sell more treasuries.
Yields are heading towards more attractive levels, but the path of least resistance is for treasury yields to rise. Inflation could be an additional concern for the U.S. bond market, but when dissecting the movement of the U.S. yield curve into different components, it doesn’t seem to be the greatest concern.
Longer-term inflation expectations have been stable despite alarming results of consumer inflation expectation surveys.
Last week’s Purchasing Managers Indices (PMIs) suggested that European economies, including the UK’s, remain sluggish. More notable was the significant improvement in U.S. business conditions, at least as far as new orders are concerned. But perhaps the most significant series of data was that related to output prices.
According to the PMIs, a significant majority of U.S. companies increased their prices. Since the ‘Liberation Day’ announcements, that proportion has been increasing sharply. The increase was “overwhelmingly linked to tariffs”, according to company responses.
So, while it’s been frustrating that surveys continue to suggest that the impact of tariffs has been more meaningful than activity data suggest, here’s more compelling evidence that tariffs will weigh on U.S. consumers and businesses in the coming months.
UK retail sales figures for April were pleasantly surprising, with a 1.2% increase in sales over the month. The sunny weather and late Easter likely played a big role in boosting sales, especially for outdoor goods and Easter treats.
However, some of the growth was simply a rebound after a couple of tough months. As a result, it’s likely that retail sales will slow down in the coming months.
The underlying trend is still positive though. Retail sales have been steadily increasing since late 2023, driven by growing real wages and consumer confidence. Spending should continue to grow, albeit at a slower pace.
On the inflation front, the news is more mixed. Inflation surged to 3.5% in April, driven mainly by government-set price hikes, such as the 26% increase in water and sewerage bills, and the doubling of Vehicle Excise Duty rates. Airfares and package holidays also contributed to the rise, partly due to the timing of Easter. However, even excluding these one-off factors, underlying inflation pressure remains stubborn.
The Bank of England’s Monetary Policy Committee (MPC) is likely to proceed with caution, and the two additional rate cuts previously expected this year now seem open to question. Looking ahead, headline inflation will average around 3.5% between April and December, driven by strong wage growth, hikes to the minimum wage, and tax increases.
It’s expected to remain above target for an extended period, risking further de-anchoring of inflation expectations and persistent wage pressure. This is what the MPC needs to guard against.
UK bonds weakened over the week. They’ve been buffeted by both inflation and strong sales but also in sympathy with the bond vigilantism in the U.S.
Earnings season is winding down, but Nvidia, arguably one of the most closely watched stocks of all, is left to report.
The oil cartel is hosting a virtual meeting and will potentially expand production again (weighing on oil prices).
Although the Consumer Price Index release was benign, the Federal Reserve’s preferred measure of inflation is the core Personal Consumption Expenditures Index, which will be released at the end of the month.
If the onset of tariffs was a major headwind for the markets, then the easing of them should be seen as a tailwind. Globalisation allows countries to specialise in activities in which they have a comparative advantage; doing so increases global economic growth, allowing each country a larger individual share of that growth.
With that in mind, the news last week was dominated by the lifting of trade restrictions. After ‘Liberation Day’, it has become increasingly clear that the Trump administration is seeking deals to lower tariffs. However, questions remain over which countries it will deal with first, when this will be done and by how much the tariffs will be lowered.
We got a partial answer last week when U.S. President Donald Trump announced a “full and comprehensive” trade agreement with the UK. For context, this isn’t a traditional free trade agreement, which would take the form of an international treaty and would usually need to be implemented by legislation. Instead, this is President Trump agreeing to amend the trade tariffs that he placed on UK exports by executive order under emergency powers.
As far as we can tell, the agreement is verbal at this stage, and details will be agreed over the coming weeks. America had placed 25% tariffs on steel, aluminium, cars and car parts from all countries, but the UK has achieved a partial exemption from that, with steel and aluminium being potentially zero tariffed.
The UK has also been promised preferential treatment when President Trump applies tariffs to the pharmaceutical sector. In both these instances, details remain unclear. Most UK car exports to the U.S. will be tariffed at 10% and there were some agreements on aeronautical deals (the U.S. buying engines from the UK and the UK buying planes from the U.S.). The cost of these easements is that the UK has had to drop some agricultural tariffs, it will probably adjust its digital services tax, too.
The overall impact of these measures is likely to be very small, though. This is partly because the most significant measure, the 10% universal tariff rate on all (now most) exports to the U.S., will remain in place, so the average tariff rate has only come down a little bit.
Moreover, the UK runs fairly balanced trade with the U.S. anyway, and so the initial measures didn’t really affect us that much. Achieving big gains from trade is now much harder than it used to be, since the most significant barriers have already been dismantled.
Declining tariffs are generally good news, however, the UK deal suggests that trade with the U.S. is likely to be subject to a minimum tariff level of 10% on most goods. As discussed, a couple of weeks ago, the U.S. seems very ready to reduce tariffs with China. President Trump reiterated last week that he won’t do so pre-emptively, but it is clear that the current rate of 145% tariffs won’t remain in place.
The UK also agreed a more conventional trade deal with India after three years of negotiation. The government says this deal will boost the UK’s gross domestic product (GDP) by £4.8billion by 2040. To put this into context, that’s only 0.19% of the UK’s current GDP.
However things play out, this isn’t likely to be something that really moves the needle for the economy. Overall, tariffs remain a force that’s likely to depress growth and increase inflation, but they’re set to decline from their current levels.
The Bank of England’s Monetary Policy Committee (MPC) probably had relatively little notice of the trade deal, and its effect was marginal anyway. Instead, the MPC has been focusing on an economy which has experienced relatively little growth momentum and a cooling inflation picture.
As an important caveat, there will be an increase in inflation over the coming months due to gas and electricity bills, but beyond that, disinflationary pressures seem set to bring the inflation rate back down towards target.
Jobs growth has been softening, and job postings have been declining. The cost of employees has risen due to the increase to Employers National Insurance contributions, and companies now have the options of absorbing the costs in their profit margins, passing them on in higher prices (inflation), or reducing their staff numbers.
This creates a lot of uncertainty, which was reflected in a three-way split when the MPC voted on whether to cut interest rates last week; two members wanted to cut interest rates faster and two wanted to stay on hold.
In the end, the majority decision was a 0.25% cut, but that uncertainty meant that markets reduced their expectations for future cuts for the time being. Interest rates are currently expected to fall from 4.25% to 3.5% or 3.75% by the end of the year.
As we’ve seen so often before, the markets are climbing the wall of worry that was built by President Trump’s erratic behaviour during the first few months of his second term.
Interest rates have been falling in the Eurozone, have started to fall in the UK, and will likely fall in the U.S. too (eventually).
Last week, the U.S. Federal Reserve left interest rates unchanged (as expected) as the outlook for inflation is difficult to gauge due to the erratic trade policy environment.
However, with equity sentiment quite depressed, the conditions for markets to continue climbing that wall of worry seem quite supportive in the short term.
U.S. inflation will remain above target, with few adverse effects from tariffs being evident in the first month since they were implemented.
The markets have recovered, but the National Federation for Independent Business (NFIB)’s Small Business Survey will show whether there’s been any moderation in the anxiety that companies are feeling over the new trade environment. It seems likely that the gloom has only deepened.
Jobs data should show a continued slowdown in jobs growth due to higher employment costs. The first estimate of UK Q1 GDP will hopefully show a slight pick-up in growth, driven by higher consumer spending.
In many ways, it was the opposite reaction to what would normally be expected. OPEC increases energy production when energy is undersupplied or reduces it when demand for oil is weak (this usually happens when the economy is weak). It does this to prevent the oil price from falling too low.
OPEC is a cartel. It manages the oil price to ensure that oil producing countries make healthy profit margins. Unusually low demand or members producing too much oil are two reasons oil prices could be weak.
Since the ‘Liberation Day’ tariffs were announced, growth expectations have generally declined. Normally, you might expect that OPEC would reduce production in anticipation of weaker oil demand. Instead, it announced increased production immediately after the tariffs were announced; this week, it announced further increases. Why?
OPEC has been struggling to control the energy market because of new supply introduced from non-OPEC members. The U.S. is a big one since it developed shale oil. While OPEC restricts its own production to maintain high margins, it’s also ceding market share to higher-cost shale oil producers at the same time.
Despite OPEC’s efforts, the oil price has fallen, largely due to weak demand from China. OPEC may have decided that if it can’t maintain the margin it needs, then its next best option is to leverage its position as lowest cost producer, pump more oil, allow the price to fall and discourage further supply from non-OPEC members.
The early part of U.S. President Donald Trump’s second term has been challenging for stocks. Most notably U.S. stocks, which took their biggest hit when he shifted his rhetoric from “Make America Great Again” to “Make America Wealthy Again”. This coincided with his announcement on ‘Liberation Day’ tariffs, prompting a remarkable sell-off in global, particularly U.S ,stocks.
Within a week, those tariff measures were partially walked back. Notably, the 90-day delay in the implementation of the individual tariff rates, affecting 60 countries, prompted a sharp rally in stocks.
However, the president was keen to impress that the tough stance on trade was still in place by doubling tariffs on China. The situation has been chaotic ever since. Businesses have been in turmoil as they grapple with the measures and Apple announced last week that the measures would impose $900 million in additional costs this quarter.
It presumably could have been worse, as the impact of tariffs was again diluted in response to a revolt from investors and business leaders. Consumer electronics were exempted, and although President Trump attributed this to the forthcoming additional measures on semiconductors, so far, those measures haven’t materialised. All of this has allowed a period of ‘announcement-calm’, during which the stock market has recovered most of the ground lost since ‘Liberation Day’.
By the end of Thursday last week, the S&P 500 had risen for eight consecutive days, a record run of strength. That still leaves U.S. stocks well below Inauguration Day levels, and the extent of the U.S. recovery is flattered when presented in local currency terms (i.e. U.S. dollars), due to the weaker dollar. Perhaps the leadership of the U.S. recovery has been a more significant factor.
Over this very short period, investors have used this weakness as an opportunity to get back into the exceptional U.S. companies that will benefit from the artificial intelligence (AI) revolution, a trend that will certainly outlast President Trump’s second term. Whether ‘Trumpism’ endures beyond the next few years remains less certain.
Last week’s U.S. Q1 GDP estimate was weak, suggesting that the U.S. economy contracted by -0.1% in Q1 (-0.3% on an annualised basis). Although this might suggest that the tariff policy has been a failure, in truth, the headline weakness is quite misleading.
Anticipation of tariffs prompted businesses and consumers to stock up ahead of possible measures. Imports detract from GDP while exports add to it, so this front-running weighed heavily on GDP in Q1. Final demand, by contrast, was very strong, also reflecting front-running of tariffs.
Trade will certainly be more of a tailwind in the second quarter; however, the uncertainty and higher costs are likely to be an overwhelming headwind to both consumption and investment.
The economy is currently showing potential, despite business and consumer surveys suggesting otherwise.
Consumer confidence, according to the U.S. Conference Board, has collapsed to a level last seen in the depths of the initial COVID-19 wave. Respondents expressed more negative views on the labour market, expected higher inflation, and perceived the highest risk of recession in two years.
Businesses responding to the Institute of Supply Management (ISM) Manufacturing survey were also downbeat. Decline in new orders slowed, suggesting that business activity continues. The anecdotal comments released alongside surveys have been telling. All 10 issued by the ISM mentioned tariffs in a negative light, citing difficulty in finding non-Chinese sources for tariffed imports, and an inability to tender for business because of the uncertainty over costs.
All eyes are on the labour market now. A fall in job openings reported Tuesday and a rise in jobless claims reported on Thursday, alongside the survey evidence listed above suggest the jobs market should be weakening. However, the official jobs report was a little stronger than expected. There were some negative revisions to previous reports, but forecasts now expect jobs growth to slow down to around 50,000 per month over the rest of the year.
Last week highlighted the different negotiating styles of the Chinese and U.S. administrations. We have previously described how Trump’s negotiating style aligns with aspects of his book ‘The Art of the Deal’ (despite allegations that he wasn’t particularly involved in its writing).
The key philosophy of ‘thinking big’ has been evident in terms of the measures used and, presumably, the concessions sought, although little substance has come from the negotiations so far. He has been aggressive, and outspoken, which are key tenets of ‘The Art of the Deal’ approach. One missing element has been a resolution. The book suggests that negotiations should be reconciled quickly, something that is unlikely to be possible in trade negotiations. Perhaps most controversially, President Trump has actually made concessions. In general, his book suggests that concessions are unwise and can be perceived as a sign of weakness.
However, he does suggest that a very aggressive negotiating stance can be moderated to make the opponent feel they have achieved something. It’s certainly conceivable that for many countries, reducing a 20% tariff to 10% could be perceived as a victory, despite being in a much worse position that they were just a few months ago.
China is now seeking to reduce a 145% tariff, which offers enormous scope for negotiation. According to Trump’s book, concessions should be given in return for negotiating wins, which has categorically not happened yet, it seems clear that the strategy has been at least partially flawed.
By contrast, China’s approach seems more consistent with Sun Tzu’s ‘The Art of War’. Ironically, despite being a military treatise, the text recommends avoiding conflict where possible. It takes a more strategic and measured approach, which seeks to win without fighting.
Last week, China sought to project a strong position, claiming not to be in talks with the U.S., while representatives of the White House were keen to concede that a deal and tariff reductions are possible; they’ve even suggested that current tariff rates are unsustainable. It seems to have been a public relations victory for China so far, but that doesn’t diminish its powerful need to persuade the U.S. to reduce taxes on trade with the richest economy in the world.
UK interest rates:
The Bank of England is strongly expected to cut interest rates to 4.25% on Thursday, with rates ultimately falling to 3.5% by the end of the year.
U.S. interest rates:
The Federal Reserve is highly unlikely to change policy this month. A rate cut in late June is seen as a more realistic possibility.
Chinese trade:
China will release trade numbers for the month of April. Tariffs rose ahead of April, and then rose more sharply during the month, so it will be interesting to see to what extent that is evident.
President Trump said he would be willing to “substantially” pare back his 145% trade tariffs on China and said both sides have been talking, though China has denied the latter. From being unapologetically provocative on China to the suggestion of “being nice” in just a matter of weeks, it’s no wonder ‘Trump chickens out’ is a top trending hashtag on Chinese social media Weibo.
The softening in aggressive rhetoric came after a meeting with key U.S. executives from Walmart, Home Depot and Target. The sky-high tariff rates on China will significantly disrupt supply chains, risk empty shelves when inventories are run down, and raise the price of imported goods for the average American consumer. This is an indication that opinions from the Corporate American elites have some sway on President Trump.
Though perhaps the reason for backing down is simple, the trade war between the U.S. and China is ‘not sustainable’ as Treasury Secretary Scott Bessent neatly put it. The U.S. has a trade deficit of $274 billion with China, from where it imports $439 billion and exports $165 billion.
At first glance, it seems China stands to lose the most, if a large part of these export revenues is lost. But as China stands firm and as days go by, it becomes increasingly apparent that the U.S. will suffer more in the near-term given its heavy reliance on a range of household goods and industrial inputs from China. American businesses and consumers will either find it difficult to substitute those Chinese imports or will pay a higher price due to tariffs.
Given the sensitivity of U.S. consumers on inflation and how integrated U.S. businesses are with supply chains in China, it’s difficult to see how these astronomical tariff rates can last for weeks, let alone months or years.
Aside from tariffs, President Trump also U-turned on his claims of firing Fed Chair Jay Powell. While President Trump reiterated his call for interest rate cuts, he said he had no intention of firing Chair Powell. Whether he means it from the bottom of his heart is debatable, but the point is, the bond market serves as a guardrail on how far he can test the boundaries.
While the trade drama is almost certain to continue, the recent developments did provide hope that the worst of the provocations are over. What we can learn from last week is that economic pragmatism and market pressures do hold Trump back, at least to some extent. That said, some credibility on the U.S. administration is damaged and investors are assigning a higher risk premium on U.S. assets under Trump 2.0.
It’s certainly a welcoming development that the most aggressive tariff rates may scale back. Given the economic damage is self-inflicted, the U.S. administration does have control to reverse all these damaging decisions. What it cannot control and easily amend is the confidence and credibility lost.
The impact of policy uncertainty on economic activity is often manifested through the confidence channel. We have already seen a plunge in various U.S. consumer and business surveys, with a worrying combination of higher price expectations and a decline in the desire to spend or invest. The latest Purchasing Managers Index (PMI) in major developed economies provided yet more evidence of the potential stagflationary (higher inflation, lower growth) impact of Trump’s tariffs.
Since the escalation of trade tariffs, various high-profile executives and sell-side economists have been warning about the negative impact. The latest World Economic Outlook by the International Monetary Fund (IMF) presents another authoritative voice on the subject. Unsurprisingly, the IMF has downgraded global growth forecasts due to trade tensions and deteriorating sentiment.
The 2025 U.S. GDP growth forecast has been slashed by 0.9% to 1.8%, a very significant downgrade in just a matter of three months. While a U.S. recession is not expected, the IMF has raised the probability of this happening to 40%. Setting aside cyclical worries, the new reality highlighted by the IMF is that the global economic system, that has operated for the last 80 years, is being reset.
After the decisive rate cut by the European Central Bank due to economic concerns, the question is how far central banks will go to cushion the economy from tariff blows. There is a willingness to cut rates to support the economy for sure, but it all depends on whether there’s room to do so i.e. does inflation mean monetary policy can be loosened.
It’s interesting to hear the views of Monetary Policy Committee (MPC) member Megan Greene on the subject. She feels tariffs actually represent more of a deflationary risk than an inflationary risk.
While the tariffs are expected to raise prices in the U.S., the UK could see the opposite effect due to the diversion of cheap Asian exports, a weaker dollar and the softening of demand from slower growth. The takeaway from the perspective of one of the most hawkish policymakers of the Bank of England is that the concern on growth probably outweighs that of inflation.
While Fed Chair Jay Powell is applauded to stand firm on no rate cut for now, two Fed officials expressed support for a rate cut if there’s more evidence of an economic slowdown and deterioration in the labour market.
It seems that central bankers are adopting an agile mindset to deal with this new macro environment of multiple shocks. As growth outlook deteriorates, traders are pricing in a few more rate cuts in the UK, U.S. and the Eurozone for the rest of 2025.
Tariff negotiations
We anticipate news on negotiations between the U.S. and Japan, South Korea and India, as well as any follow-up on the proposed lowering of tariffs on certain U.S. goods by China.
Inflation update
We’ll get personal income, spending and Personal Consumption Expenditures (PCE) inflation data from the U.S. Any sign of slowdown in consumer spending may inject more worry into the markets.
Big tech earnings
Tech heavyweights including Meta, Microsoft, Amazon and Apple are due to report next week. Analysts will be keen to hear how CFOs are modelling and navigating tariff risks in their financial projections.
Any weakness felt by the U.S. is often assumed to be felt even more harshly by its trading partners as it’s transferred to them via the global financial system. An important difference in this period of stress compared with previous ones is the unorthodox strategy the U.S. has adopted of fighting all its trading partners simultaneously. As a result, the economic impact is likely to fall more heavily on the U.S. than on other countries.
There’s also the question of whether the start of trade talks will see the U.S. negotiating on a weaker dollar through some kind of accord.
Some of President Donald Trump’s advisers see the devaluation of the dollar as a policy goal. This is because the Pax Americana, which has existed since the end of the Second World War, has since been shown to bear some economic costs (perceived or real) for the U.S.
Most notably, the establishment of the Bretton Woods Agreement cemented the U.S. dollar as the reserve currency of the global financial system. It required other countries to accumulate foreign currency reserves in dollars.
An inadequate supply of dollars would restrict the amount of trade that could take place, but trading partners need to get those dollars from somewhere and the only possible sources are loans, U.S. foreign aid, or earning them through trade.
So, initially the U.S. needed to supply the world with dollars, which it did through the Marshall Plan (aid) and running trade deficits, eventually undermining the dollar’s convertibility into gold. While the currency stability implicit in the Bretton Woods Agreement ended during the 1970s, the use of the dollar as a reserve currency remained.
During the 1980s, this caused the dollar to appreciate relative to other currencies. The Plaza Accord – a joint agreement between France, West Germany, Japan, the United Kingdom, and the United States – was signed, in which all participants agreed to intervene to weaken the dollar.
Stephen Miran, the Chair of President Trump’s Council of Economic Advisers, has previously published a plan for a Mar-a-Lago Accord, with the objective of bringing about a weaker dollar. A weaker dollar could be an area in which the president and his advisers are in agreement.
However, a weaker dollar seems likely to imply higher borrowing costs (less foreign ownership of treasuries), which would bring real costs to U.S. taxpayers. If the U.S. does want to weaken the dollar, there are ways for investors to benefit.
hat would happen if foreign central banks reduced the weightings to dollars within their foreign exchange reserves. A beneficiary would be gold, which has been very strong.
Gold, which had once accounted for around 60% of foreign exchange reserves, fell to just 6% during the financial crisis and gradually rose until 2024, when its growth sped up, reaching nearly 15% once more.
Various actions may have motivated this. Many developing world economies have held large U.S. dollar foreign currency reserves, but reliance on the dollar exposes them to sanctions that the U.S. might wield in the future.
The U.S. president’s recent apparent disregard for key federal institutions, such as the judiciary and the independent central bank, is concerning and could potentially weaken the dollar even further.
This was brought into sharp relief around the Easter weekend, when President Trump made a series of comments and social media posts insulting and expressing his dissatisfaction with Federal Reserve Chairman Jay Powell.
Added to this is the possibility that current day America no longer wants the central role in the global trade and financial system that American economist Harry Dexter White negotiated for at the Bretton Woods conference.
The first round of trade talks began last week. Japan is the first government to be granted the opportunity to negotiate with the U.S. According to mercantilists, Japan has been a longstanding adversary to the U.S. In fact, it was Japan that inspired President Trump to publish his open letter calling for protectionism in 1987.
President Trump announced that the talks had seen big progress, although details were scant. Ryosei Akazawa, Japan’s Economic Revitalisation Minister, said more talks will take place this month and that the currency wasn’t discussed.
That’s a surprising development because Japan’s alleged currency manipulation has been a constant source of President Trump’s ire. The resolution of trade issues with Japan may take months and it remains to be seen how many concurrent trade negotiations the U.S. is prepared to run. Japan alone will not materially change the size of its trade deficit.
Being forced into a U-turn doesn’t seem to have dimmed President Trump’s appetite for tariffs. He continues to promise sector-specific measures, including ones covering the semiconductor supply chain.
Surveys have shown weakness until now, which hasn’t yet been followed through in ‘hard’ economics data.
UK inflation data last week was helpfully soft. However, this could reflect weakness in the economy. Retail sales numbers should hold up based upon the release of the British Retail Consortium’s shop sales survey data earlier last week.
The announcement made a couple of weeks ago of a 10% universal tariff, and individual tariff rates of up to 50%, put America’s weighted average import tariff on a path towards 28% and hit the stock market hard.
It raised concerns for U.S. growth, questions over the judgement of the Trump administration, and indicated prices for goods in the U.S. would rise. Last week, these concerns moved from the equity market to the bond market. Bond markets have a history of ending misguided policies.
In September 2021, a riot in the bond market brought down Liz Truss’ doomed UK premiership, as she unveiled an expansionary budget at a time when UK spare economic capacity was very low. Going back even further, it was the currency market that caused the UK to leave the European Exchange Rate Mechanism at the behest of market vigilantes, led by American billionaire George Soros.
U.S. Secretary of the Treasury Scott Bessent cut his teeth working for Soros. He’s on record as deriding tariffs as being inflationary and causing dollar appreciation. However, towards the end of 2024, while in contention for his current role, he acknowledged their worth as a negotiation tool. Bessent spoke to President Trump a couple of weekends ago, urging him to take a more measured approach that would give him more leverage.
Finally, the respected head of J.P. Morgan, Jamie Dimon, expressed his concerns about the measures on Fox News. We may never know which of these factors led President Trump to change course on tariffs, but that’s what he did.
Individual tariff rates will be deferred for 90 days to allow time for negotiation, according to the administration. The logistics of negotiating more than 60 trade deals seem incredibly challenging, and so most investors expect that these 90 days will inevitably be extended.
The market reaction was violent, with stocks rising nearly 10% in the following session, the NASDAQ actually rose more than 12%. However, investors are under no illusion about an enduring universal 10% tariff still being a headwind and not all countries were spared.
China saw wild fluctuations in the anticipated tariff rates last week. At the end of the week, some categories of consumer electronics were exempted from the measures. Over the weekend, President Trump confirmed that this exemption was related to the fact that the entire semiconductor value chain would be subject to additional measures, which are scheduled to be announced this week and come into force over the next month or so.
Tariffs raise prices for consumers, and although it may seem like we’ve been talking about nothing else for months, we are still at least a month away from seeing the first impact in official inflation data.
Taming inflation is consumers’ top economic priority, a point that the president’s advisers will surely have made in arguing for a more measured range of import taxes. Meanwhile, inflation data for March was a little weaker than expected.
This was partly due to gasoline prices, but there was also a weakness in used cars and core services (with airfares and hotel rooms being the key categories). This suggests that consumers may be cutting back in anticipation of a weaker economy.
It won’t last, of course. From next month, prices should start to reflect tariffs and are likely to rise to a pace of 4% this year. The persistence of inflation is hindering hopes that the Federal Reserve might provide some relief for the embattled U.S. consumers and markets. However, the odds of a rate cut in the early May meeting have dropped sharply since the tariff U-turn.
Away from the U.S., news that some tariffs will be deferred reduces the headwinds for growth.
It’s true that many non-U.S. countries are far more open than the U.S., meaning that trade, both imports and exports forms a large share of gross domestic product (GDP).
However, these countries are only suffering a big increase in tariffs on the U.S. portion of their trade, unlike the U.S. itself, which is suffering tariffs on all its trade. So, lower tariffs affecting a share of their growth is incrementally good news, which means the headwind to growth is lower.
Meanwhile, any weakness in demand from the taxed U.S. import market seems likely to weigh on prices in other international markets.
China is the exception; its individual tariff rates weren’t reduced. In fact, they were raised further to 145%, making China more of an isolated target than had been the case at the beginning of the week.
As mentioned above, following this latest increase, there was some considerable relief given in the form of exemptions for some consumer electronics. This will likely weigh heavily on Chinese growth but could present an investment opportunity. The Chinese authorities are not fighting inflation like other central banks, meaning that they can deliver stimulus to their consumers without risking high prices.
Furthermore, President Trump has signalled a willingness to negotiate with China. So, low expectations, the likelihood of stimulus measures, and the possibility of trade deals in the future that could see a sharp cut to tariffs could combine quite powerfully to revive flagging Chinese stocks.
Earnings season:
Although the first companies reported on Friday, earnings season really steps up this week.
UK inflation:
Inflation on Wednesday should show price growth slowing in the UK. Together with Tuesday’s employment data, this could help solidify the basis for a May interest rate cut.
U.S. retail spending:
The last U.S. retail spending data hinted at lower consumer spending in February. Last week’s consumer price index (CPI) report suggested something similar in March. Will the latest consumer spending figures continue?
Although the President ordered a review of all unfair trade restrictions, the actual tariffs were set at half the level of each country’s trade surplus against the U.S. If that seems arbitrary, what was even more so was the fact that countries in deficit to the U.S. were still hit with a tariff, undermining any credibility to the spurious claim that surpluses are evidence of protectionism.
It is an outrageous opening offer from a president who prefers making deals to policies. As he says in his book ‘The Art of the Deal’, “I always go in with a very low offer, and I always assume that the other side will negotiate.” But has he overplayed his hand?
U.S. equities have noticeably underperformed European stocks, with individual companies reflecting the folly of protectionism. Apple has a business model in which its manufacturing is done in China and Vietnam, two countries at the more severe end of U.S. tariff announcements.
Maybe this is activity the U.S. would like to be conducted at home, but it doesn’t have the capacity to do so. Nike is a great example of an iconic American brand whose high value-added activities take place in the U.S., while the manual and laborious manufacturing activity takes place where labour is cheaper. Bringing those jobs to the U.S. relies upon American workers being willing to do the work.
President Trump is ready to make deals, but whether there’s any scope to reduce the baseline 10% tariff seems highly questionable, and some potential growth has been diminished. For decades, he has lauded the tariff and bemoaned America’s trade deficit, so he sees tariffs as here to stay, and they’ll be oppressive until the U.S. trade deficit comes into balance.
However, tariffs won’t achieve that objective and so will remain in place. The scope of them is likely to be reduced somewhat, though due to the president’s fondness for making deals. Coupled with his clampdown on immigration, some of the key tenets of U.S. exceptionalism are being undermined, and it makes sense to look more widely for investment opportunities.
The backdrop for last week’s tariff announcements was supportive of a tough Trump bargaining position.
The most obvious data point was Friday’s non-farm payroll report, which showed that a consensus-beating 209,000 new jobs were created in March. This was a surprisingly strong figure, which suggests an acceleration of hiring relative to previous months, quite at odds with the depressed business surveys that have been prevailing recently.
In terms of caveats, the last two months did see downward revisions, but they weren’t huge with signs from the latest shunto (annual spring wage negotiations) that companies are willing to countenance higher payments.
The unemployment rate rose slightly more than expected, which always seems unintuitive when jobs growth has been strong. This can sometimes be reflective of immigration, although that seems less likely at the moment. Instead, more Americans are entering the job search, which is reflected in a slight recovery in the labour force participation rate.
It’s a little surprising to see these data strengthen. Whilst surveys can be unreliable, particularly at emotional times when there’s a lot of partisanship, there are some distinct reasons for employment to weaken this month that seem incontrovertible; the Department of Government Efficiency (DOGE)’s federal spending cuts, for example.
Whilst it’s difficult to trust the accuracy of the cost-cutting achievements DOGE has published, executive outplacement firm Challenger, Grey and Christmas estimated this week that over 200,000 federal workers had been laid off during March alone. The official data only showed a few thousand job losses, so it may be that the bulk of them appear in next month’s revisions.
Whether accurate or not, President Trump will be emboldened by the apparent strength of the labour market, which will make him a tougher negotiator for trade partners. The good news is that the rise in the unemployment rate, relatively subdued wage growth, and increased labour participation will help make the case that the Federal Reserve should cut interest rates.
Gold sold off on ‘Liberation Day’ as investors took profits, reflecting the fact that bullion is one of a handful of goods that are exempted from tariffs (the others are critical minerals).
The new government is thinking strategically about access to natural resources, and they won’t be the only ones. Central banks have been building up their non-dollar reserve assets in anticipation of a time when requiring a lot of dollars may be less of a priority.
That has been the trend that has pushed gold higher and, aside from the exemption, ‘Liberation Day’ should encourage reserve managers that their diversification strategy is appropriate.
The common 10% tariff rate began over the weekend, but the individual tariff rates will take effect from Wednesday 9 April (unless they’re changed).
The results of Q2 will be released at the end of the week.
U.S. inflation data released on Thursday (10 April) should show the annual rate slowing, although this will likely be the calm before the storm.
Last week was supposed to be the calm before the storm of U.S. President Donald Trump’s self-styled ‘Liberation Day’, when tariffs will be imposed on a range of the country’s trading partners.
The week saw plenty of information and disinformation over when the tariffs will come, before seeing a surprise announcement on Wednesday relating to taxes on car imports.
President Trump imposed 25% trade tariffs on vehicles and car parts last week. According to the White House, the move was made in the interest of national security, for which the automotive industry is a vital component. The tariff on finished vehicles will apply from 3 April, while the tariff on parts will be imposed a month later.
President Trump has consistently expressed his frustration over the practice of building cars in other countries before selling them in the U.S.
This new policy aims to encourage more car manufacturing in the U.S. instead. The president hopes this will increase U.S. employment and reduce the U.S. trade deficit. The U.S. sells around 15 million vehicles per year, with some demand having probably been brought forward in anticipation of tariffs.
The U.S. currently produces around 10 million vehicles annually and, at a stretch, it appears to have capacity for 13 million. Over time, the shortfall can be met through additional investment in auto plants, which take a couple of years to build.
There are two important questions to be asked:
1. How long will the tariffs need to remain in place to make executives willing to commit to expensive new plants in the U.S?
2. By the time the plants are erected, how long will be left of President Trump’s term, at the end of which policies may be different?
Around 28% of Japan’s exports to the U.S. are cars, so the country will be impacted by this latest tariff announcement. Japanese Prime Minister Shigeru Ishiba insists that all options are on the table when it comes to retaliation.
However, Japan has moved a lot of its car manufacturing to America, and so a portion of its sales will be protected. Economic consultant Capital Economics estimates that around 70% of sales by Japanese firms to U.S. companies are already manufactured in the U.S.
So, despite the considerable threat from the imposition of tariffs, interest rates are still expected to rise in Japan. Members of the Bank of Japan’s Monetary Policy Board seem concerned that food price inflation could be persistent, and there have been signs from the latest shunto (annual spring wage negotiations) that companies are willing to countenance higher payments.
At a time when other countries are pondering how fast to cut their interest rates, Japan is poised to continue hiking, especially since consumer prices in Tokyo on Thursday remained stronger than anticipated, which will therefore be true of the equivalent nationwide inflation measure, too.
Friday saw the full release of the UK’s 2024 gross domestic product (GDP) numbers. The economy grew by just over 1% last year, despite some pre-election giveaways by the outgoing administration. The new government shone a light on the fiscal situation, and in doing so cast a shadow over UK consumer confidence.
Whilst Friday’s numbers show just how turgid the second half of 2024 was, they do reveal that during the final quarters, the combination of growing real wages and cautious spending led the saving rate to reach nearly 12th the highest figure since 2010, indicating that UK consumers have been saving.
The benefit of that was felt in January and February; retails sales figures seem to suggest that the UK consumer headed back to the shops in the first months of the year. The benefit was also seen in the UK services purchasing managers index (PMI), but below the surface of a strong rebound lies some gloom in the form of contracting employment, which is a response to rising employment costs.
The increase to Employers National Insurance contributions, which was announced in the 2024 Autumn Budget will take effect from this April. The new tax year will also see first-time buyers paying Stamp Duty Land Tax (SDLT) when buying a home, ending a preferential treatment that saw them exempt from paying any SDLT on properties worth up to £425,000.
Inflation was below forecasts, but this was mainly due to a few volatile items. We know that utility bills will be back on the rise in April, which means inflation will be back above 3% for the rest of the year.
The economy seems stronger in the first quarter of 2025, but inflation is persistent. The Bank of England’s Monetary Policy Committee seems keen to cut interest rates at least twice over the next year, but it will be banking on a slowdown in inflation (excluding utility bills).
In the Spring Statement on Wednesday, the chancellor confirmed that government spending was on track to break one of her fiscal rules. The government had been on track to spend £9.9 billion less than it was receiving in 2029/30, but rising interest rates meant that this headroom had been lost.
Over the previous week, the government announced welfare cuts that will take effect from April 2026, in addition to further economic measures.
By extraordinary coincidence, the £9.9 billion headroom was restored but as the last six months have shown, such a small margin means that every time interest rates seem to rise, the prospect of more taxes or spending cuts in autumn will rise.
The temperature of most major economies will be taken this week with the S&P Global PMI (and the Institute of Supply Managers surveys in the U.S.)
The U.S. is expected to announce on Friday (4 April) that 135,000 new jobs were created during March.
President Trump will announce reciprocal tariffs on trading partners on Wednesday (2 April).
Contact us
Let us know your enquiry and we’ll be in touch.
