April was an eventful month for financial markets, beginning with President Trump’s Liberation Day announcement on April 2
Amid heightened market volatility, the White House announced a 90-day pause on “reciprocal” tariffs and pulled back on threats to fire the Fed chair
Consumer and business surveys have revealed sharp declines in sentiment, which have yet to flow through to hard data readings in a material way
The Fed has remained noncommittal regarding future policy amid trade uncertainty
Sometimes a month gives us very little to contemplate from a market perspective. April 2025 was not one of those months. Instead, we experienced what felt like years’ worth of headlines and market moves in a relatively short timeframe. It all began with President Trump’s “Liberation Day” announcement on April 2, which entailed sweeping tariffs on all trading partners that far exceeded market expectations. As noted in last month’s commentary, the ensuing global market reaction was severe and swift across various asset classes. The following week, the White House appeared to blink in the face of market turmoil with the announcement of a 90-day pause on “reciprocal” tariffs, while maintaining 10% baseline tariffs against all trading partners except China. Trade with China is effectively shut down with both sides charging tariffs of 125% or more, and now we wait to see any potential supply shocks related to the stalemate.
Market volatility picked back up again when President Trump escalated his criticism of Fed Chair Powell for not cutting rates, suggesting that Powell’s termination was a possibility. The threats against Fed independence, along with the stalemate between the US & China on trade relations spooked markets again. This prompted another pivot from the White House, with Treasury Secretary Bessent saying that the trade war with China was “unsustainable,” and Trump backing down on his threats against Powell, relatively speaking. This had some semblance of a “Trump put” for market participants, and demand for fixed income credit was notably improved in the last several days of April. We would caution against the presumption of predictability with the current administration, but these were two clear examples of relenting in the face of heightened market volatility. Current spread levels remain wider than before the initial 4/2 announcement, but we have partially retraced from the widest levels of April. Exhibit 1 provides a snapshot of the volatility in asset returns throughout April. Equities and fixed income credit recovered most of the peak April selloff, but the US Dollar Index remains closer to the intra-month low.
Exhibit 1
Market volatility has also come down from the April highs, but uncertainty remains the most prevalent theme as economists, market participants, business owners, and consumers alike look for clarity on the ultimate endgame of the current trade war. Many companies are declining to provide earnings guidance amid the uncertainty, and backwards-looking economic data has less relevance. That said, GDP contracted 0.3% q/q annualized in Q1, the first quarterly decline in three years, but there was a lot of noise within the report. A surge in imports relative to exports shed nearly 5 percentage points from the topline growth rate, but personal consumption was stronger than expected. Were consumers and businesses both frontrunning tariffs in the first quarter? Some of the data suggests so, such as a surge in auto purchases in March, but spending in other discretionary spending categories (restaurants, amusement parks, etc.) suggested otherwise. That said, it’s too early to tell.
Business/consumer sentiment surveys have been very negative in recent months, as heavily publicized in financial headlines, but survey results don’t necessarily translate into actual hard data results (i.e., what I say versus what I do). The biggest question marks at this point related to tariffs are two-fold: 1) what will the first bilateral trade deals look like, and 2) how long will it take before trade relations with China are unfrozen? Markets are more focused on the first item on the assumption that #2 will take longer to play out. How much economic pain results is yet to be determined.
All of this leaves the Fed in a tough spot. Fed fund futures continue to price in more 2025 rate cuts (1.02% as of April 30) than the median FOMC forecast from March 19 (0.50%). Rate cuts have a greater impact on the demand side of the equation, but if inflation comes from supply shocks, demand stimulus (rate cuts) could potentially exacerbate the inflationary impact. On the other hand, a sharp slowdown in the economy typically has a deflationary effect via higher unemployment, reduced investment, etc. There has been some dovishness expressed by certain Fed leaders in recent weeks, namely from Governor Chris Waller, but the general sentiment from most Fed leaders is that they are in wait-and-see mode and ready to act if clarity improves.
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