The US markets have been rocked by tariff tensions, as President Donald Trump stays on the offensive with his tough trade stance policy.
The major indices continued the downward slide that has played out over the past weeks, as the market’s anxiety over Trump’s tariffs stoked potential recession fears.
The benchmark S&P 500 flirted with the threshold for a correction. It fell over 9% before clawing back some gains on the back of better-than-expected CPI data, only to fall into a technical correction later in the week, down 10.1% at the time of writing.
The concerns on Wall Street were exacerbated by Trump’s comments that Americans may feel “a little disturbance” from ongoing trade wars with major trading partners. Trump’s agenda has so far been focused on tariff policy, which has given rise to concerns around the outlook for US growth. We are yet to see more favourable pro-growth policy items like tax cuts and deregulation, which may temper some recession fears and balance out his policy agenda.
The S&P500 is now down over 4% from when Trump took office in early November. Trump’s first presidential term was categorised by his view of the equity market as somewhat of an approval rating. What has caught many strategists by surprise is that this time around he seems to be sticking to his tough stance on trade policy, and is “not even looking” at what is happening in the market. Markets are now re-evaluating growth forecasts, which has spurred the downward trend.
The risk-off sentiment has resulted in investors rotating capital from equities and into recession havens like government bonds. This has resulted in US 10-yr Treasury yields falling 10 basis points before once again rising, as the market continued to digest the news flow of the ever-evolving trade war.
Positive Signs in the Fight Against Inflation, but Still a Way to Go
February CPI data was closely watched by the market on Wednesday. In what would be a relief to the Fed, both headline and core CPI came in below expectations, rising 0.2% MoM each or 2.8% and 3.1% YoY respectively. The print gave confidence to the market that the hot January reading may have been somewhat of an outlier, and a product of notoriously murky seasonally adjusted January numbers. In January CPI rose by 0.5% MoM , prompting calls from the market that the inflation fight was far from being under control and Trump’s pro-growth strategies were only exacerbating the problem.
Fast forward to February and the cooler-than-expected numbers were received positively by the market, with the S&P 500 rising on futures and finishing the day in the green. Treasury yields initially fell, but retraced some of this move once the market digested the data. Strategists highlighted that the many of the newly imposed tariffs were not reflected in the February CPI numbers, which will likely push up prices. Looking deeper at the release, we can see that much of the slowing in inflation was due to a pullback in consumer demand, led by a reduction in the prices of food (excluding eggs which are still experiencing a shortage from an outbreak of avian influenza), air fares and used cars.
PPI numbers released on Thursday are another key input for the full PCE measure - the Feds preferred measure of inflation. The numbers came in largely in line with market expectations. This likely won’t be enough for the Fed to determine if there is a genuine trend of disinflation in the US economy, but will provide them with some comfort that the US can avoid a stagflationary environment i.e. lower growth but higher prices.
Jobs Data Provides Positive Light Amongst Uncertainty
In a positive shift for US economic data, US job openings rose in January while in February firings fell, and the quits rate picked up. The positive data comes after a downward trend for the past three years. Job openings increased to 7.74 million in January, with the trend remaining above pre-pandemic levels, suggesting employers are still looking to hire. The quits rate, which as the name suggests, measures how many people voluntarily leave their jobs, rose to its highest level since July.
Higher quit rates indicate worker confidence in the ability to get higher paying jobs, which typically is an indicator that workers believe that the economy is improving and businesses are hiring. This data seems to point to the continued resilience of the US labour market. A big caveat to note however is that the job openings data is for January, which pre-dates much of the DOGE pullback in government jobs. We would expect the February data to be a little less positive. The Fed will be closely monitoring US employment data for signs of significant softening to help inform their next move.
The Atlanta Fed Nowcast for Q1 has shown a large downswing in GDP. The gauge is a running estimate of GDP in the current quarter, with the Q1 release showed GDP dropping from +2.3 to -2.8%. Prima facie this would be cause for concern, however much of this downswing can be attributed to tariff frontrunning. Businesses increased imports through January to get ahead of tariffs and to warehouse stock in the US. This large uptick in imports with a modest decrease to exports caused the net export ratio to swing downwards. While the consensus is that growth hasn’t collapsed, the gauge will still be watched carefully for any signs of weaking.
The Fed Focus on Separating the Signal From the Noise
Lower interest rates would help quell some of the economic anxiety felt by the market, but Federal Reserve officials have indicated they’re not likely to move for some time. The Fed is in wait-and-see mode, and is likely to hold rates steady at the next board meeting, with Federal Reserve chair Powell indicating that they want more confirmation that inflation is on track to their 2% goal. Powell stated that they would like more time to fully evaluate what the effect of Trump’s tariffs will be on the economy: “as we parse the incoming information, we are focused on separating the signal from the noise” – a prudent thought.
The bond market is currently pricing in a further 75bps of cuts through 2025. This is 40bps more than what was priced just a month ago, a significant change in sentiment.
Where to from here?
Global and domestic equity markets are now starting to look oversold in our view, given the macro concerns are more fear-based than evidence-based at this juncture.
Monthly US CPI numbers released this week suggest the US economy is, for now, still experiencing an inflation downswing, while the most recent labour market data suggests the economy continues to expand at a trend-like pace. However, markets remain concerned that the inflationary and growth impacts of Trump’s tariff policy are still ahead of us.
The prospect of tariffs will remain a key market overhang until at least April 2nd, when the Department of Commerce releases its comprehensive trade review. This is likely to result in a continuation of volatility over the near-term. We retain a neutral view on global and Australian equites, and we are overweight fixed interest and Alternatives and underweight cash.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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