(Fixes typo in the headline)
ORLANDO, Florida (Reuters) – TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Halfway to recession
If investors wanted a reminder of the impact tariffs and trade wars have on markets, they got it on Wednesday as figures showed that U.S. GDP shrank in the first quarter, pushing Wall Street sharply lower before a powerful late rally ended an incredibly turbulent month on a positive note.
Wednesday marked U.S. President Donald Trump’s first 100 days in office, also a tumultuous period, by any measure. But what do the next 100 days hold for markets? More on that below, but first, a round-up of the main market moves.
I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Trade? It’s a drag
The U.S. economy shrank in the first quarter for the first time in three years, as trade dealt its heaviest blow to GDP on record. Another contraction in the April-June quarter will meet the definition of a technical recession.
The late rebound on Wall Street was remarkable and came out of the blue, but perhaps even more interesting was the bond market’s reaction to Wednesday’s U.S. economic data.
Since peaking just below 4.60% on April 11, the yield on the 10-year U.S. Treasury note has fallen around 45 basis points. But it crept up on Wednesday and the curve steepened again, suggesting inflation concerns rather than contracting economic activity drove longer-dated bond prices.
Meanwhile, the 0.3% contraction of GDP in the first quarter pushed the two-year yield lower for a fifth day in a row, the longest declining streak since February. Traders moved to price in a Fed rate cut in June and another three by the end of the year.
But prices are sticky, and tariffs are likely to keep them that way. The GDP deflator, a proxy for inflation, was 3.7% in the first quarter, higher than the expected 3.0%. Meanwhile, the headline reading of PCE inflation in March also released on Wednesday was slightly higher than expected at 2.3%.
With stagflation pressures rising and barbs from the White House flying, Fed Chair Jerome Powell is in a difficult position. Powell has steered a straight path down the middle, insisting that more hard data is needed before the Fed acts. But right now, it looks like the ‘stag’ risks are weighing more heavily on policymakers’ minds than the ‘flation’.
If there’s one central bank traders are convinced will sit on their hands for the remainder of this year, however, it is the Bank of Japan, which announces its latest rate decision on Thursday.
Global trade, economic and market turbulence looks to have put the BOJ’s tightening cycle into long, cold storage – rates markets are pricing in only 15 basis points of hikes this year, down from around 75 bps in late January.
Japan’s economic surprises index is heading south and is close to turning negative, while Japanese bond yields look to have reached a plateau.
That’s a yen-negative backdrop. But Treasury yields are falling faster, U.S. growth is shrinking, and Fed rate cut expectations are intensifying. Throw in the yen’s ‘safe haven’ status as Japanese investors bring money home, and the yen’s outlook is suddenly a lot brighter. Strategists at TS Lombard on Wednesday said dollar could fall close to 130.00 yen later this year.
Dazed and confused, markets brace for Trump’s second 100 days
The first 100 days of Trump 2.0 were incredibly turbulent for world markets, as tariff-fueled chaos wiped trillions of dollars off U.S. asset prices. What will the second 100 days of President Donald Trump’s administration look like? They will probably be less volatile, but markets may be underpricing the downside risk.
Wall Street and the dollar ended Trump’s first 100 days sharply lower as investors around the world reassessed their willingness to hold U.S. assets.
Even though many markets, including the S&P 500, hit record highs in the month after Trump’s inauguration in January, U.S. stocks ended up having their worst first 100 days under any president since Richard Nixon’s second term in 1973, and the dollar index ended the period down nearly 10%.
But several global markets have rebounded from their lows, as Trump has backed away from some of his more extreme policies and dialed down his rhetoric. The MSCI World index is now off only 3% since inauguration day. Chinese, British and European stocks are essentially flat, while the MSCI Asia ex-Japan index, Germany’s DAX and India’s Sensex are all up between 2% and 7%.
Some of this relief is justified, but markets may be a bit too optimistic about what the next 100 days have in store.
ROCKY ROAD
Peak tariff chaos is probably in the rear-view mirror, but even if global levies are reduced, they will still be the highest in decades. And trade tensions between China and the U.S. – the world’s two largest economies – likely won’t ratchet down quickly. Markets don’t appear to be priced for the trade disruption and economic slowdown this is apt to cause.
Global equity valuations have cheapened since January, but not by much, and European multiples are beginning to tick back up again. Meanwhile, 12-month forward earnings forecasts for the S&P 500 continue to rise to new highs, nudging $280 per share.
Does this point to confidence in the resilience of the U.S. and the global economy or complacency? Keith Lerner, chief investment officer at Truist, reckons it’s the latter, especially given how narrow the scope is for sizeable U.S. fiscal and monetary policy support.
Lerner estimates the near-term potential for the S&P 500 is no more than 5% on the upside, and greater than 10% on the downside.
“Markets have gone from pricing in a decent amount of bad news at the recent lows, to providing less of a buffer should we have a rockier road ahead,” he wrote on Tuesday. “The risk-reward appears less attractive at current levels.”
The sudden collapse in U.S.-China trade, record uncertainty, and months of limbo for households and businesses while the U.S. negotiates dozens of trade deals suggest downward global growth revisions like the International Monetary Fund’s last week may be too benign. Even if recession is avoided, stagflation may not be.
PEAK TRUM
The bullish case, of course, is that the first 100 days marked “peak Trump”, meaning the shock, chaos, and selling across markets won’t be repeated in the coming months. Tensions with U.S. rivals and allies will thaw, and the world will return to something resembling normalcy.
Perhaps some of this is playing out. Elon Musk’s influence on White House policy is waning, as the Tesla chief has scaled back his DOGE time commitment. Trump has tempered his attacks on Federal Reserve Chair Jerome Powell, and the U.S. administration is sounding more conciliatory on tariffs.
In that light, one could argue that U.S. “Big Tech” is now cheap and doubts over the dollar’s safe-haven status are overblown. The U.S. economy remains the world’s most innovative and dynamic, and there are huge fiscal boosts coming down the pike in Europe and China.
Time to buy then? Not so fast. As a recent JP Morgan survey notes, even though investors may be hopeful for de-escalation in the trade war, they also fear “lasting damage” is being done by the administration’s efforts to create a new world order. They also have “very little conviction on the (administration’s) endgame” or which asset classes to own.
Low conviction, high uncertainty and fears of long-term damage don’t make for a particularly bullish backdrop, even if the next 100 days are a lot less tumultuous than the first
What could move markets tomorrow?
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Jamie McGeever,)
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