Fed Sidelined Amid Tariff Uncertainty

For the week ending 21 March 2025

As of midday Friday, global equities edged lower on the week amid continued uncertainty over the scope of the US tariffs scheduled to be unveiled on 2 April. The yield on the US 10-year Treasury note declined 9 basis points from a week ago to 4.21% while the price of a barrel of West Texas Intermediate crude oil added $0.90 to $67.90. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), slipped to 19.9 from 22.2 last Friday.

MACRO NEWS

Fed sees slower growth, higher inflation

The US Federal Reserve held rates steady in a range of 4.25% to 4.5% on Wednesday and updated its economic projections. Policymakers lowered their median economic growth forecast to 1.7% in 2025 from December’s 2.1% projection. The median inflation forecast rose to 2.7% from 2.5% and the committee’s collective unemployment view rose 0.1% to 4.4%. The FOMC reduced the cap on the runoff of Treasuries from its balance sheet to $5 billion a month from $25 billion while holding the mortgage-backed securities cap steady at $35 billion. Uncertainty around the economic outlook has increased, they said. Fed Chair Jerome Powell’s press conference was viewed dovishly by markets. It would be appropriate to look through tariff-based inflation as transitory, he said, while noting that long-term inflation expectations remain well anchored. Powell dismissed the jump in inflation expectations as measured by the University of Michigan survey as an outlier. The chair reassured markets that the US economy remains strong overall, and while recession odds have moved up, they are not high. The Fed, Powell said, is focused on hard data, not sentiment, and that has not deteriorated yet. On Friday, Federal Reserve Bank of New York President John Williams stressed the high level of uncertainty that the Fed faces and said it needs to be very data-dependent in its policymaking.

German parliament eases debt brake

Germany’s Bundestag, the lower house of parliament, approved a constitutional amendment to allow for greater debt-financed defense, infrastructure and climate spending. The upper house is expected to ratify the vote on Friday. Spending that exceeds 1% of GDP on defense and security, including intelligence agencies and assistance to Ukraine, will be exempt from the debt rules. The package establishes a €500 billion fund for Germany's infrastructure over the next 12 years, including €100 billion in climate-related spending. It’s hoped that the outlays will help lift the German economy, which has been flirting with recession for two years, into a higher-growth phase. 

Trump, Putin fail to agree ceasefire terms

US president Donald Trump and Russian President Vladimir Putin, after speaking for several hours on Wednesday, were unable to reach agreement on a 30-day ceasefire but made progress toward an energy and infrastructure ceasefire and a potential halt to maritime attacks. Ukrainian President Volodymyr Zelensky said Ukraine would draw up a list of facilities that could be subject to the partial ceasefire. Negotiations toward a full ceasefire and permanent peace will continue in the Middle East, Trump and Putin agreed.

Investor sentiment hits the skids

Several recent surveys suggest investors have become extremely bearish on US equities, a hopeful sign for contrarians. The Bank of America fund managers’ survey this week showed that allocations to US equities dropped significantly in March due to stagflation and trade war fears. Managers reported being 23% underweight US equities, a 40% drop from the previous survey. Cash allocations rose to 4.1% from 3.5%, the biggest jump since 2020. The American Association of Individual Investors said in its survey for the week ended March 19 that the bearish camp held steady at around 58%, little changed from a week ago. About 21% held a bullish outlook over the next 6 months. A bear/bull ratio of this magnitude has historically been a bullish signal.

QUICK HITS

Trump reiterated this week that the rollout of reciprocal and sector-wide tariffs remains on track for 2 April.

US February existing home sales rose 4.2% month over month as mortgage rates eased and inventory grew. The median home price rose 3.8% year over year to $398,400.

White House Press Secretary Karoline Leavitt told reporters on Thursday “there will be big tariffs.”

US forces conducted sustained attacks on Houthi command and control and launch sites in Yemen and said operations will continue until threats on shipping are halted. Trump warned Iran that it would suffer consequences if it continued to back the rebels.

China reported firmer February industrial production and retail sales data. Both measures beat forecasts, with production expanding 5.9% and retail sales 4%. State media announced Monday that the government will “vigorously boost consumption” and “expand domestic demand in all directions.” The plan will focus on raising incomes, stabilizing the real estate and stock markets, and improving medical and pension services.

Late Friday, 14 March, Moody’s upgraded Greece’s credit rating to investment grade.

US Treasury Secretary Scott Bessent said this week that he is not at all worried about the stock market and that corrections are healthy. However, he said that there are no guarantees that the US will avoid recession. He said he remains confident that tax policy, deregulation and energy security will drive long-term market growth.

A fire and power outage in West London led to the closure of London Heathrow airport on Friday, sparking a major disruption.

French Premier François Bayrou said his government won’t lower the French retirement age back to 62 from 64. His government is at risk of being forced out by the Socialist Party over the issue.

Analysts at Deutsche Bank noted that 10% corrections in the S&P 500 led to recession only 44% of the time.

Rengo, a consortium of Japanese labor unions, expects base wages to rise a robust 3.75% this year.

British Chancellor of the Exchequer Rachel Reeves promised to scrap “duplicative and unnecessary” reporting requirements for financial services companies by rewriting laws inherited from the European Union. Reeves also ruled out tax hikes in the upcoming spring budget statement.

Canadian CPI rose 2.6% in February, exceeding expectations for a rebound to 2.2% from January’s 1.9% rate. 

US industrial production rose 0.7% month over month in February and factory output rose 0.9%. Both measures were much stronger than expected. Capacity use rose from 77.7% to 78.2%, with carmakers accelerating production ahead of tariffs.

This week, Trump named US Federal Reserve Governor Michelle Bowman Vice Chair for Supervision, replacing Michael Barr.

The New York Times reported this week that China is open to trade negotiations with the US but that it is being “stonewalled” by the US State Department and other official channels.

Beijing has criticized the purchase of the port operations of Hong Kong-based CK Hutchison by a BlackRock-led consortium and raised concerns that it may attempt to derail the deal using antitrust actions.

Canadian retail sales fell 0.6% in January and are likely to fall 0.4% in February, according to StatCan.

The European Commission pushed ahead with regulatory actions against US tech giants Apple and Google despite simmering trade tensions with the US.

Frustrated by a lack of progress toward the release of remaining hostages being held by Hamas, Israel launched limited military operations in Gaza this week. In response, Hamas launched rockets toward Tel Aviv for the first time since the ceasefire began in January.

Wage growth in the United Kingdom remained robust in the quarter ended in January, rising 5.8%. Real wages grew 3.1%. Unemployment held steady at 4.4%. The solid employment backdrop may keep the Bank of England on the monetary sidelines until the second half of the year. It held rates steady on Thursday.

Canadian Prime Minister Mark Carney is expected to call a snap election for 28 April, according to the Globe and Mail.

THE WEEK AHEAD        

Monday: Preliminary global PMIs

Tuesday: US Case Shiller Home Price Index, new home sales, Conference Board Consumer Confidence

Wednesday: Australia CPI, UK CPI, US durable goods orders

Thursday: US Q4 GDP, pending home sales

Friday: UK Q4 GDP, retail sales, ECB inflation expectations, eurozone confidence surveys, Canada GDP, US PCE inflation