The Week Ahead
Markets will likely remain volatile this week amid trade war developments; the VIX Index has, this morning, spiked to levels last seen during the Covid pandemic. Today, we have German industrial production and trade data, and eurozone retail sales. EU trade ministers gather to discuss the US tariff package, and we will hear from the Fed’s Logan. On Tuesday we have Samsung’s earnings, later UK PM Starmer appears before the Parliament Liaison Committee, and the Fed’s Daly discusses economic outlook and Fed policy, and the ECB’s Holzmann and BoE’s Lombardelli also speak. US wholesale inventories and the FOMC’s minutes are due on Wednesday. However, markets will likely be focused on the US tariffs that take effect for more than 50 countries. Central bank chatter includes the Fed’s Barkin and the ECB’s Knot and Cipollone. China and US inflation data takes centre stage on Thursday. We will hear from the Fed’s Goolsbee, Harker and Logan, and the BoE’s Breeden. Germany CPI, UK industrial production, and US PPI and the Uni. of Michigan consumer sentiment prints will keep markets busy on Friday, as will major US bank earnings reports.
Last week asset classes were rocked by Trump’s retaliatory tariffs, further denting already fragile global growth concerns. Later we had the broadly resilient US employment report, which was largely ignored. Non farm payrolls surprised to the upside at +228k jobs, (exp. +140k), while unemployment slipped to 4.2%, and average hourly earnings eased to 3.8%yoy. Other US data included a narrowing trade deficit, from USD130.7bn to USD122.7bn; this data will become more relevant given the Trump administration's emphasis on addressing trade imbalances with international trading partners. The ISM Services survey fell to 50.8 (from 53.5). Sub-components declined across prices, orders, and employment, with the employment index plunging to 46.2 from 53.9, signalling labour market deterioration.
Given the mounting geopolitical and trade tensions, Fed chair Powell, in a mildly hawkish statement said that the recent tariff announcements are “significantly larger than expected” and their inflation impact “could be more persistent”. Despite this, Fed futures ramped up expectations for Fed rate cuts this year, from 3 to more than 4. The yield on the 10-year rallied 25bps, falling below 4%, while the S&P Index fell 9.08%. The DXY Index fell ~1%, and oil tumbled 10.93% to $65.58pb.
Elsewhere, President Trump's 34% reciprocal tariff on Chinese imports has raised total additional tariffs this year to 54%, creating approximately 65% total US tariff exposure on Chinese goods. China responded confrontationally with matching 34% tariffs, triggering market volatility. While the potential GDP impact on China could reach 1% in 2025, actual consequences may vary due to price pass-through to US consumers. Key developments to monitor include China's emerging role as a free trade advocate in Asia, the heightened risk of US-China economic decoupling, China's pivot toward stimulating internal consumption through monetary policy, and growing geopolitical tensions as China shifts agricultural sourcing from the US to South America, heightening its strategic interest in the Panama Canal.
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