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Markets and macro insights with Bernard Swords, Chief Investment Officer
How did equity markets fare last week?
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Equity markets were somewhat calmer last week. In local currency terms, world equities were up 1.3%. Investors are in a ‘wait-and-see’ mode prior to a new series of tariff announcements at the beginning of April.
What conclusions are to be drawn from the outlook for the US economy?
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Few surprises emerged from the meeting of the US Federal Open Market Committee (FOMC) – the interest-rate-setting committee of the US Federal Reserve. However, the output was less ‘hawkish’ than expected. The Federal Reserve is clearly becoming more sensitive to the growth outlook, and so has reinforced the expectation that there will be two further cuts in interest rates this year.
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Revised growth rates for the US economy have not brought us into danger territory (which is a relief for investors), and the hard data continues to be supportive. There seems little reason to change strategy, as growth is continuing, although slowing below trend in the short term. Broader economic activity, however, is unlikely to show a positive picture.
What were the specific outcomes of the FOMC meeting?
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As expected, the FOMC left interest rates unchanged. More interesting were its updated forecasts for the US economy, and its interest rate expectations. The inflation forecast was increased and the growth forecast reduced. Core inflation for 2025 (as measured in the Personal Consumption Expenditures or PCE data) is now expected to run at 2.8%, i.e. at a similar point to the present time, and up from the previous forecast level of 2.5%. The FOMC left the 2026 forecast at 2.2%. We can therefore conclude that the Federal Reserve is working on the assumption that tariffs will provide a one-off shock to inflation, but that there will be few second-round effects.
What are the prospects for US economic growth?
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The Federal Reserve now expects the US economy to grow by 1.7% in 2025, down from the previous forecast of 2.1%. It cut the 2026 forecast by 20 bps to 1.8%. A more persistent growth impact is nevertheless expected from higher tariffs. This may be why the committee members still expect two more cuts in interest rates this year despite the increase in inflation forecasts.
How do the major investment banks rate US growth prospects?
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The Federal Reserve has not been the only institution altering forecasts for the US economy. Over the last four weeks, we have seen a number of the major investment banks revise their economic forecasts for the US economy as they start to factor in the impact of tariffs. The result is fairly similar across all of these forecasts. The growth outlook for 2025 is being cut by 0.4% and there are small cuts to the 2026 estimate.
What is the outlook for inflation?
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Core inflation is expected to remain close to current levels in 2025 and drop towards 2% in 2026. Such a trend is encouraging. Up to now, economists have not attempted to factor in the impact of tariffs on the broader economy because there was no clarity about their scale or scope. Now tariffs are an element in the analysis, and we can begin to assess their role rather than speaking in general terms of anxieties or uncertainty.
How is consumer performance?
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News on US consumer performance still shows conflicting signals. The level of activity is robust, but sentiment is weak. In February, core Retail Sales rose 1% month-on-month against expectations of 0.4%, representing the fastest level of growth since September 2024. However, the trend in January was weak, such that overall, we can observe a marked though not drastic slowdown in consumption growth.
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Meanwhile, consumer sentiment continues to deteriorate. Last week, the University of Michigan consumer sentiment survey once again showed a drop, to the lowest level in over two years. An expectation of further inflation was the main driver of the decline. Our recommendation is that investment decisions should be informed by the hard data concerning actual consumer activity, while remaining aware of the concerns indicated by the soft data (sentiment surveys).
What is the news from the euro area?
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The German fiscal package has been passed, but despite the prospect of largescale debt increases, euro area fixed income markets have been improving. Long yields in Germany are down c. 15 bps from the recent highs. That gives us confidence that the higher sovereign debt levels resulting from the change in German fiscal policy have been priced into markets.
What does Chinese data on growth show?
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Chinese data is somewhat better this year so far, showing a modest slowing of activity, though not to the extent expected. Industrial production growth slowed to 5.9% year-on-year in January-February. However, this result was an improvement on the forecast of 5.3%. Retail sales rose 4% against expectations of a 3.8% growth. The application and impact of tariffs will constitute the major challenge for China in the second quarter.
The week ahead: what to watch out for
Next week, there will be more soft indicators. From Europe and the USA, the Purchasing Manager Indices will be released, and we will receive Consumer Confidence data from the euro area. On the inflation front, the monthly PCE will be released.
