Investment Viewpoint: searching for calm

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Markets and macro insights with Bernard Swords, Chief Investment Officer

How did markets fare in recent days?

• • Equity markets seemed to be pausing for breath following the recent volatility – that was until we saw President Trump’s broadside against Jerome Powell, the Chair of the Federal Reserve, due to the latter’s reluctance to lower interest rates. The conflict is not new: a difference of viewpoint between the two has been evident since Trump took office. Reaction was affected by the fact that the disagreement aired on Easter Monday, when many markets were closed or traders were on holiday, leading to low levels of liquidity. It is unlikely to alter the Federal Reserve’s thinking and adds to the lack of confidence in US government policy. We would bear in mind the following:

  1. The US market has underperformed significantly this year, back to where it was relative to the rest of the world in 2023.

  2. Economic growth forecasts for the US have been adjusted downwards but the last move was up.

  3. The US market still has the highest exposure to ‘emerging industries’ and structural themes.

  4. The exchange rate has adjusted significantly.

  5. Rather than giving up on the US equity market, we would view the current turbulence as an opportunity to build up US equity exposure.

  What was the situation in Europe?

  • The role of central banks in affecting market performance reasserted itself. The European Central Bank (ECB) held its policy meeting and cut interest rates by 0.25%, as expected. This brings its deposit rate to 2.25%. The ECB justified its measure with the observation that “the disinflation process is well on track.” It noted that headline and core inflation declined in March, and referred to the recent easing in services inflation.

  • In conclusion, the bank predicts that “most measures of underlying inflation” suggest that it will settle at around 2%, the medium-term target of the ECB Governing Council. The ECB outlook for the European economy has been revised due to the uncertainty created by US policy, and so it may even in the short term introduce further rate cuts.

  What is the situation in the US?

  • The US Federal Reserve appears to be adopting a different approach to that of the ECB. Chair Powell’s remarks last week raised the possibility that there may not be any cuts to interest rates in the short term. As tariffs on US imports will be at a much higher level than for goods entering Europe, the Federal Reserve needs to be sensitive to the impact of tariffs on inflation.

  • It would therefore seem that the deteriorating economic outlook in the US will not receive any boost from rate cuts as the Federal Reserve awaits the impact of tariffs on inflation before altering its current stance.

  What new data emerged to clarify the overall outlook?

  • In the US, Core Retail Sales growth was somewhat lower than expected at 0.4% up month-on-month, but remains roughly in line with forecasts. Industrial production fell 0.3% month-on-month, but this was entirely due to a 5.8% month-on-month drop in utilities output due to warmer weather.

  • Manufacturing output was up 0.3% month-on-month and 5.1% quarter-on-quarter, the strongest showing since 2022. The data reaffirms the belief that the US economy is performing as well as expected, taking into account the volatility induced by tariffs.

  What was the news from China?

  • China’s GDP growth came in at 4.9% quarter-on-quarter annualised in Q1, down from a growth rate of 6.6% in Q4 and below consensus expectations for 5.7%. However, March data was stronger. Industrial production was up 7.7% year-on-year, well above consensus expectations of 5.9% Retail sales were up 5.9% year-on-year, against a forecast level of 4.3%. Once tariffs begin to have an impact from April onwards, this overall picture is likely to change.

The week ahead: what to watch out for

Business sentiment surveys will be released in the US and in the euro area. These are likely not to be positive, given the new US government’s attachment to tariffs as a significant policy instrument.