Tariff saber-rattling shakes markets

April 1st, 2025

RECAPPING LAST WEEK

Tariff saber-rattling and a firmer core PCE inflation reading left U.S. equity indices lower for the week, culminating in a sharp selloff on Friday. The S&P500, Nasdaq Composite, and Russell 2000 indices fell 1.5-2.5%, while commodities such as gold and copper continued to benefit from concerns over trade, tariffs, and geopolitical uncertainty. S&P500 sector performance tilted negatively, dragged down by technology weakness, while value stocks and equal-weight indices sustained their outperformance versus growth and market cap-weighted measures. U.S. Treasury yields gave back most of their weekly gains Friday despite February’s core PCE reading being above expectations at +2.8% YoY.

Interest rates and risk assets jumped earlier in the week on reports that trade tariffs might be narrower than initially expected. Those moves quickly reversed after the White House unveiled a 25% tariff on imported vehicles mid-week. The U.S. imported $474 billion worth of automotive products last year, with passenger vehicles making up nearly half of that total. While the inflation report wasn’t especially hot, it could keep the Federal Reserve in a holding pattern on interest rates for longer, especially considering the uncertainty regarding tariffs.

Domestic business activity expanded in March according to the S&P Global flash PMI survey; however, fears over government spending cuts and import tariffs weighed on sentiment and prospects going forward. Consumer confidence sank to a four-year low and the expectations index reached a 12-year nadir. In the revised University of Michigan consumer sentiment survey, one-year inflation expectations ramped up to 5%, while the five-year outlook surged to 4.1%—the highest level since 1993. In housing news, new and pending home sales rebounded modestly last month but remained well below normal historical levels due to the “lock-in” effect of high mortgage rates. The National Association of Realtors expects rates to average 6.4% this year and 6.1% in 2026, lower than recent forecasts but still likely to crimp housing supply and demand.

Overseas, British bond investors saw some relief after UK Finance Minister Reeves revealed lower-than-expected borrowing plans last week. The flash PMI results suggested that the Britisheconomy would grow by a marginal 0.1% in the first quarter. UK consumers showed signs of increased spending since the start of the year, with retail sales rising 1% in February, while the prior month was revised higher. In Europe, German business sentiment rose in March amid optimism for a new government and expanding investment, while manufacturing production increased for the first time in nearly two years. Finally, minutes from the Bank of Japan’s January meeting suggested a growing consensus on further interest rate increases, provided that current price outlooks hold. Tokyo’s core CPI jumped to +2.4% YoY, above forecasts of 2.2%.

THE WEEK AHEAD

As the first quarter of 2025 draws to a close, investors seem keen to reduce risk ahead of Wednesday’s expected announcements on reciprocal tariffs. More clarity on the U.S. administration’s endgame could produce a relief rally for risk assets, while an extension of deadlines would likely keep volatility elevated. This week’s economic calendar features the ISM PMI surveys along with monthly U.S. employment data. Businesses have turned more cautious with hiring plans, and the changes in government and private payrolls will be closely watched to gauge the effects of recent layoffs. The rest the U.S. economic calendar includes trade balance figures and factory orders. Fed Chair Powell is scheduled to speak at a conference on Friday. In Europe, inflation figures will be announced today for Germany and Tuesday for the wider Eurozone. Minutes from the European Central Bank’s March meeting arrive on Thursday. The Reserve Bank of Australia is expected to keep interest rates unchanged at tonight’s meeting as inflation and the labor market have cooled slightly. Last of all, China’s official government and private sector PMI survey results arrive this week.

(Schwab)

Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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