4 April 2025
Harsh US Tariffs Send Markets Lower
A review of the week’s top global economic and capital markets news.
AUTHOR
Jamie Coleman
Senior Strategist, Strategy and Insights Group
For the week ending 4 April 2025
As of midday Friday, global equities were sharply lower after US President Donald Trump announced harsher-than-expected tariffs against US trading partners. The yield on the US 10-year note fell 0.35% to 3.92% as fears of a global recession rose precipitously. Those fears, as well as an OPEC+ output hike sent the price of a barrel of West Texas Intermediate crude oil prices skidding below $62 from above $69 a week ago. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), climbed to 29.65 from 20 last Friday.
MACRO NEWS
“Supermax” US tariffs send markets reeling
US President Donald Trump announced a slate of tariffs on Wednesday that exceeded many analysts’ worst-case scenarios. The White House imposed a 10% baseline tariff on all imports into the US (excluding those from Mexico and Canada), with higher “reciprocal” rates for about 60 countries with goods trade surpluses with the US reaching as high as 50%. Rather than matching the tariff rates imposed on the United States by other countries, the Office of the US Trade Representative said that US reciprocal tariffs are calculated as “the rate necessary to balance bilateral trade deficits between the US and each of our trading partners.” The White House then imposed rates of roughly half that calculated by USTR as an intended token of US generosity.
The silver linings in this week’s announcement were that Mexico and Canada will not face an incremental tariff hit and the reciprocal tariffs will not stack on the sectoral tariffs on steel, aluminum and autos. With the tariffs coming into effect over the next week, the average effective US tariff rate is estimated to reach between 22% and 25%. Additional sectoral tariffs are expected on pharmaceuticals, semiconductors and lumber.
On Thursday, Canada announced 25% tariffs on some autos imported from the US. Friday, China imposed a 34% tariff on US imports, matching the US reciprocal rate. The European Union has pledged countermeasures while other countries are seeking negotiations or exemptions. On Thursday, Trump told reporters he was open to negotiating on tariffs if the US received “phenomenal offers.” However, on Friday morning, Trump said on social media that his policies “will never change.”
Market reaction to the news was negative, with global equities falling sharply, market volatility soaring, interest rates falling in anticipation of a substantial slowdown in economic growth and the US dollar weakening considerably.
US payrolls jumped in March
Amid the tariff gloom, news Friday morning that US nonfarm payrolls were stronger than expected provided a modest respite. The economy added 228,000 jobs in March, handily beating expectations for a 140,000 gain, though the unemployment rate ticked back up to 4.2% from 4.1% as the labor force participation rate rose to 62.5% from 62.4% in February. However, there was a downward revision of 48,000 jobs to the prior two months payroll gains. Four thousand federal jobs were lost in March, the data show. The numbers suggest the labor market was solid heading into the tariff announcement but that the outlook will be considerably cloudier going forward.
Powell says Fed can wait for greater clarity
US Federal Reserve Chair Jerome Powell spoke Friday morning and said that tariffs could have persistent inflation impacts and the Fed is obligated to keep inflation expectations anchored. Growth is likely to slow, he said, adding that the economic impacts of tariffs are likely larger than expected. Despite that hawkish take, Powell reiterated that Fed policy is well positioned to wait for greater clarity. Expectations of Fed rate cuts grew this week as a result of growing recession fears. At last Friday’s close, futures markets anticipated three rate cuts this year. At midday Friday, traders had fully priced in four cuts.
QUICK HITS
US equities fell sharply on Thursday, the first trading day following the reciprocal tariff announcement. The S&P 500 declined 4.8%, the Nasdaq 100 fell by 5.4% and the KBW Bank index lost 9.9%, its worst daily loss since the regional banking crisis two years ago. The Russell 2000® fell 6.6% on Thursday and is nearly 22% below its late-November peak. Credit spreads widened dramatically, with the Bloomberg US high-yield options-adjusted spread spiking 53 basis points higher on Thursday to 3.87%, the biggest jump since the early days of the pandemic.
Purchasing managers’ indices were mixed ahead of this week’s tariff announcement.
Marine Le Pen, leader of France’s National Rally party, was convicted of embezzling European Union funds and redirecting them to domestic political activities. As part of her sentence, Le Pen has been barred from running for office for five years, which will preclude her from running for president in 2027 unless the ban is overturned on appeal.
Economists and strategists at Goldman Sachs lowered their US growth forecasts and raised the odds of a US recession as a result of US tariff policy. They expect the levies to subtract an estimated 1.2% from US gross domestic product growth over the next year. As a result, the firm lowered its forecast for S&P 500 returns over the next three and 12 months to -5% and +6%, respectively, from 0% and 16% previously.
Eight OPEC+ members agreed on Thursday to phase out oil output cuts, increasing crude production by 411,000 barrels a day starting next month. Amid fears of global growth following the US tariff announcement, crude prices slumped about 7% on Thursday.
Frustrated with Russian President Vladimir Putin’s foot-dragging on a ceasefire in Ukraine, Trump threatened secondary tariffs on buyers of Russian oil if progress toward a truce doesn’t quicken.
Federal Reserve Bank of New York President John Williams said this week that there is “definitely a risk” of higher inflation but that long-term inflation expectations remain well anchored and monetary policy is well positioned to navigate uncertainty.
This week, for the first time in five years, China, Japan and South Korea engaged in trade talks, during which they discussed a joint response to US tariffs.
Canadian unemployment held steady at 6.7% in March, though 32,600 jobs were shed last month as US tariffs began to bite.
US JOLTS survey data showed continued low levels of mobility in the US labor market in February, with job openings contracting modestly while the quits and layoff rates held steady.
China’s State Administration for Market Regulation launched an antitrust investigation into the CK Hutchison-BlackRock port transaction. The investigation will delay the deal’s closing and raises the odds of it being cancelled altogether.
Preliminary eurozone inflation readings for March showed a decline in CPI to 2.2% from 2.3% in February. Unemployment fell to 6.1% from 6.2%.
Amid looming tariffs, US auto sales were strong in March, reaching a 17.8 million annual unit rate, according to Ward’s Auto. The sales pace is expected to slow as inventories are depleted and tariff begin to bite.
The odds of a global recession this year have risen to 60% from 30% as a result of US trade policies, according to J.P. Morgan.
Trump has reportedly told his inner circle that Elon Musk will leave the administration soon.
On Thursday, Fitch Ratings downgraded China’s foreign currency rating to A from A+ with a stable outlook on a weakening of China’s public finances.
Challenger, Gray & Christmas reported this week that the number of US layoffs in March jumped to about 275,000, with US government workers accounting for about 80% of those let go.
The European Commission is working on short-term economic support proposals to go alongside plans to advance reforms and competitiveness in key sectors and to improve the functioning of the bloc’s single market, according to a Bloomberg report.
Wednesday, the US Senate passed a resolution that would end President Trump’s emergency declaration regarding fentanyl flowing from Canada and thus restrict his ability to impose tariffs on Canada. Four GOP senators voted in favor. However, the US House of Representatives is unlikely to take up the legislation.
Republican lawmakers are reportedly considering raising the top marginal tax rate on incomes above $1 million to 39.6% from 37% to help pay for tax cuts promised by President Trump while on the campaign trail.
THE WEEK AHEAD
Monday: eurozone investor confidence
Tuesday: US NFIB small business optimism
Wednesday: US FOMC meeting minutes
Thursday: US CPI
Friday: UK GDP, industrial production, US PPI, University of Michigan survey
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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