Volatile Trade Dynamics Shake Confidence in US

For the week ending 11 April 2025

As of midday Friday, global equities were lower on the week but well above the week’s worst levels. The yield on the US 10-year Treasury note jumped 0.67% to 4.58% while the price of a barrel of West Texas Intermediate crude oil fell $2 to $60. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), reached 35 on Wednesday before easing back to 31 on Friday morning. 

MACRO NEWS

Under duress, Trump pauses some tariffs

With financial markets in turmoil, US President Donald Trump on Wednesday paused for 90-days “reciprocal” tariffs above a 10% baseline on all countries except China. Trump doubled, then tripled down on China, raising the tariff rate on imports from that country to 145%. China responded by raising duties on imports from the United States, first to 84% and then 125%. Beijing signaled it would not match any further increases by Washington, calling any such actions “futile.” Markets briefly welcomed the pause, with the S&P 500 index jumping 9.5% on Wednesday before falling back 3.5% on Thursday. More troubling, since the pause, has been the reaction of the bond and currency markets, where Treasuries and the US dollar remain under pressure, calling into question their traditional roles as safe havens.

The fall in Treasuries and the dollar has sparked debate over whether non-US investors are losing faith in US assets due to a chaotic policymaking environment or whether the market is merely rebalancing an overweight position in US assets. We suspect it’s a combination of the two. With the world’s two largest economies embroiled in a full-fledged trade war, uncertainty remains extremely high despite country-by-country talks between the US and some 70 other nations. Talks with the European Union kick off on Monday. 

Position unwind sends US yields higher

The unwinding of several types of interest rate arbitrage trades contributed to a dramatic rise of US Treasury yields this week. The so-called basis trade — in which leveraged traders buy Treasuries while selling futures contracts on bonds of the same maturity in the hope of picking up a few basis points of yield — began to unwind last Friday afternoon, and the selling extended into this week, culminating in a sharp spike higher in yields on Wednesday morning that was significant enough to prompt President Trump to alter his tariff stance. Similar trades where investors sold Treasuries while buying interest rate swaps added to the stress. Additionally, as was the case early in the pandemic, investors may have been forced to sell highly liquid assets in order to meet margin calls. However, the higher yields helped engender solid demand at this week’s 10- and 30-year Treasury auctions. The rise in long yields steepened the 2s-10s yield curve from 0.35% at last Friday’s close to 0.73% at the height of the market stress Wednesday morning. With Treasuries failing to live up to their traditional safe haven role, the backup in yields spooked markets broadly, with investors finding few places to hide amid very elevated levels of market volatility. 

US inflation moderates, for now

Consumer prices fell 0.1% in March from the month before and core inflation rose only 0.1%. Those figures were followed by news that producer prices fell more sharply, declining 0.4% in March from the month before and falling 0.1% when stripping out food and energy. Normally, data like these would be cause for rejoicing in the bond market, but this week markets were preoccupied by the fallout from ever-shifting US trade policy and the anticipation of higher prices resulting from tariffs. These data are backward-looking at a time when investors are intensely focused on an uncertain and potentially inflationary future. 

QUICK HITS

Inflation expectations, as measured by the University of Michigan Consumer Sentiment Survey rose to 6.7% in the year ahead, the highest levels since 1981. Consumer sentiment fell to 50.8, the lowest level since the middle of 2022, when US inflation was near its peak.

John Williams, President of the Federal Reserve Bank of New York, said Friday that he sees inflation rising to between 3.5% and 4% this year and the unemployment rate to rise to between 4.5% and 5% over the next year. Economic growth will slow to “somewhat below” 1% in 2025, he said.

CNN reported Friday morning that the White House has privately encouraged Chinese officials to have President Xi Jinping request a call with President Trump. The markets took the news as a sign that there is a deal to be had, but so far neither leader wants to make the first move.

On Saturday, the US and Iran will engage in nuclear talks mediated by Oman.

Amid heightened market volatility, China’s state funds pledged to buy more local stocks to stabilize markets.

The US House of Representatives narrowly passed a blueprint that sets the stage for negotiations with the Senate over the particulars of “one big, beautiful” reconciliation bill that would extend expiring tax cuts, cut taxes on tips and Social Security and increase spending on defense and border security. Much remains unresolved, with a number of GOP budget hawks reluctant to vote for legislation that doesn’t cut government spending deeply enough.

The Wall Street Journal reported this week that the Trump administration is revising its plan to impose steep port fees on Chinese-built vessels to lessen the impact on US exports. The plan is to base the fees largely on vessel capacity and to ease the charges on ships carrying agricultural exports like soybeans and timber.

Goldman Sachs upped its odds of a US recession on Wednesday afternoon but quickly revised the odds down to 45% after the White House announced a 90-day pause. Goldman also lowered its outlook for Chinese growth to 4% in 2025 from 4.5% earlier.

Germany’s Christian Democratic Union and Social Democrats reached a coalition agreement on Wednesday. Included in the agreement are plans to cut corporate tax rates by 1% a year for five years beginning in January 2028. The coalition said it aims to spur growth by cutting the cost of bureaucracy by one-quarter.  

The British economy grew 0.5% in February from the month before, a faster than expected pace, and January data were revised up to flat from -0.1%. Both the services and manufacturing sectors showed strength, the data show.

THE WEEK AHEAD        

Monday: Japan industrial production, New York Fed one-year inflation expectations

Tuesday: UK employment, eurozone ZEW economic sentiment survey, Canada CPI, US existing home sales

Wednesday: UK CPI, US retail sales and industrial production, Canada BoC rate decision

Thursday: eurozone ECB rate decision, US housing starts

Friday: Japan CPI, European and US markets closed for Good Friday