Markets Calmer but Uncertainty Still High

For the week ending 17 April 2025

As of midday Thursday, global equities were modestly higher on the week amid continued uncertainty surrounding US tariffs. The yield on the 10-year US Treasury note fell 30 basis points from last Friday to 4.28% while the price of a barrel of West Texas Intermediate crude oil rose $4.35 to $64.35. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell back to 27 on Thursday from 31 late last week.

MACRO NEWS

Trump grants temporary tariff reprieves

Over the weekend, the Trump administration issued guidance that exempted many types of electronics from reciprocal tariffs which in the case of China the tariff rate reached 145%. Markets were cheered by the news, but it soon became clear that there was a catch: such products will likely be shifted into another tariff bucket specific to semiconductors in the next month or two. The president this week also indicated that he is considering a temporary tariff exemption on imported vehicles and parts to give automakers more time to shift production to the United States.

Markets hoped that the electronics reprieve might lay the groundwork for negotiations with China, but neither country has made the first move on talks. On Tuesday, Trump said that “the ball is in China’s court” on trade. The next day, China laid out preconditions for talks, saying the US must show respect. According to a Bloomberg report, other conditions include a more consistent US position and a willingness to address China’s concerns over American sanctions and Taiwan. China asked that the US designate a point person to lead the negotiations and appointed a new trade envoy, Li Chenggang, to lead any talks with the US in the hope of reaching an agreement that Trump and Xi Jinping can sign when they meet in person.

Meanwhile, tit-for-tat trade barriers continue to be erected by both sides. Beijing raised nontariff barriers against US agricultural exports for sanitary reasons while the US restricted the shipment of certain Nvidia semiconductors to China without a license. In March, as importers rushed to fill shelves before the tariffs were raised in April, Chinese exports surged 12.4%.

Fed’s Powell: Markets orderly, processing uncertainty

When Jerome Powell, chair of the US Federal Reserve, spoke to the Economic Club of Chicago on Wednesday, he didn’t give investors the impression that the central bank will soon act to steady financial markets. Markets are functioning properly, Powell said, but noted that recent volatility reflects high levels of uncertainty. The Fed is absolutely prepared to provide US dollar liquidity overseas, if necessary, though Powell said he doesn’t see the need to end its balance sheet reduction soon. The Fed chair said in the future the Fed may find itself in scenario where its inflation and full employment goals are in tension. However, he indicated that policy is in a good position to wait for clarity for the time being. The economic impact of the tariffs is likely to be larger than expected, their inflationary impacts may be more persistent and the trade restrictions are likely to generate at least temporary inflation, Powell warned. The Fed chair said that unemployment is likely to move higher as the economy slows but that the labor market is currently at full employment. The central bank’s role is to make sure tariffs cause only a one-time price increase, he said. All in all, the comments suggest that given the expected inflationary impact of tariffs, the Fed is unlikely to shift to an accommodative stance unless forced to by a rising unemployment rate.

President Trump was unimpressed with Powell’s remarks, posting on social media that “his termination can’t come fast enough!” Powell’s term as Fed chair expires in May 2026. The Fed, Trump said, should have lowered rates long ago.

EU expects tariffs to remain

European Union trade chief Maroš Šefčovič said that he expects US tariffs to remain in place as talks this week with the US made little progress. The EU has called the US position “undefined” after the US rejected an EU proposal to remove all tariffs on industrial goods, including autos. The US instead suggested some tariffs could be offset by European companies increasing investments in the US and the EU increasing US imports. The EU said it would not retaliate against the US trade restrictions during the 90-day reciprocal tariff pause but said it would impose countermeasures if negotiations don’t yield a satisfactory result.

GOP tax orthodoxy challenged

As Republican lawmakers struggle to find “pay-fors” to offset the myriad tax cuts President Trump campaigned on last fall, several tenets of GOP tax orthodoxy are being challenged. Among the revenue-raisers being considered is a hike in the top marginal income tax rate from 37% to 39.6% on incomes above $626,000 or alternatively, putting in place a new 39.6% bracket for incomes above $1,000,000. Also being considered is a hike in the corporate tax rate, the opposite of what Trump campaigned on. While tax hikes are unlikely to be a part of the final reconciliation package, the fact that they are even being discussed indicates that today’s Republican Party is far more populist than it has been in the past. 

QUICK HITS

The European Central Bank cut its deposit rate to 2.25% on Thursday, the lowest level since February 2023. ECB President Christine Lagarde highlighted downside risks to economic growth stemming from tariff uncertainty.

President Trump joined trade negotiations with Japan on Wednesday and touted “big progress” after the talks concluded. A second round of discussions is expected later this month.

US retail sales rose 1.4% in March, the largest jump in over two years, as consumers rushed to purchase cars ahead of US tariffs. Along with solid sales at restaurants and bars, the data suggest, despite weak sentiment surveys, that consumers continue to spend.

During Bank of America’s earnings call this week, CEO Brian Moynihan said the bank’s data show that customer spending rose 4.4% in the first quarter of 2025 from a year ago and that the 4%-plus pace continued through the first part of April.

The International Energy Agency slashed its 2025 oil demand growth forecast by 30% to 730,00 barrels a day given uncertainty over future global growth.

China’s ports handled 244 million tons of cargo last week, 10% less than a week earlier and down 4% from the same week in 2024, according to Ministry of Transport data released Monday as US tariffs began to bite.

Japan said this week that it is reviewing nontariff trade barriers including regulations on auto and agriculture imports as it seeks relief from US tariffs.

Canada’s inflation rate slowed to 2.3% year over year in March from 2.6% in February.

The US and Iran will hold a second round of nuclear talks in Rome this weekend.

Goldman Sachs cut its forecast for US economic growth to just 0.5% this year.

President Trump said he is considering an automotive tariff pause to give automakers time to adjust.

According to the US International Trade Administration, the number of western Europeans visiting the US fell 17% in March compared with a year ago.

On Saturday, the UK government seized control of British Steel from its Chinese owners, which were preparing to end primary steel production in Great Britain. As the process plays out, the company is likely to end up in public hands.

A Federal Reserve Bank of New York survey conducted in March showed that consumer inflation expectations in the US rose to 3.6% over the coming year from 3.1% the prior month. Over the three-year horizon, inflation is expected to hold steady at 3%. Over the five-year horizon, inflation is expected to fall 0.1% to 2.9%.

China’s president, Xi Jinping, this week began a tour of Southeast Asian nations to deepen trade ties.

Late last Friday, S&P Global Ratings upgraded Italy’s credit rating to BBB+, bringing it back to investment grade.

Bank of Japan Governor Kazuo Ueda told a Japanese newspaper that if US tariffs hurt the Japanese economy, the BOJ may pause interest rate hikes.

Consumer prices in the UK rose 2.6% year over year in March, slower than February’s 2.8% pace.

President Trump signed an executive order this week ordering an investigation into US imports of critical minerals imports. The US dependence on the imports “raises the potential for risks to national security, defense readiness, price stability and economic prosperity and resilience,” Trump said in the order. China this week halted exports of the minerals worldwide. Going forward, exports will require special licenses.

The Bank of Canada held rates steady at 2.75% on Wednesday, ending a seven-meeting string of rate cuts. Amid high uncertainty, the central bank laid out two scenarios. The first assumes most of the tariffs would be withdrawn through negotiations, which would stall GDP in the second quarter. The economy would then expand moderately and inflation would sink to 1.5% before returning to the 2% target. In the second scenario, the bank assumes the tariffs would spark a long-lasting global trade war. In that case, the Canadian economy would go into a recession for a year and inflation would spike, hitting 3.5%. BoC Governor Tiff Macklem said that if incoming information points clearly in either direction, the bank is ready to act decisively.

Hamas rejected an Israeli truce proposal that included its disarmament. 

EARNINGS NEWS

With about 11% of the constituents of the S&P 500 Index having reported for Q1 2025, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings rose around 7.25% compared with the same quarter a year ago and down from more than 18% in Q4 2024, according to data from FactSet. Blended sales rose 4.2% year over year.

THE WEEK AHEAD        

Monday: UK, European markets closed for Easter Monday

Tuesday: eurozone consumer confidence

Wednesday: global preliminary purchasing managers indices, US new home sales, Fed’s Beige Book

Thursday: US durable goods orders, existing home sales

Friday: UK retail sales, Canada retail sales, US University of Michigan consumer sentiment (final)