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Markets and macro insights with Bernard Swords, Chief Investment Officer
How are markets faring as the month closes?
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It was a tough end to a difficult month. Last week world equities were down nearly 1.5% to leave them almost 4.5% down for the month (all in local currency terms). Developments in US trade policy, already a prevalent theme, were the dominant concern last week: a recovery that began about two weeks ago stalled as the US imposed a tariff rate of 25% on light vehicle imports and certain motor part imports. (There are exclusions for imports covered by the United States-Mexico-Canada Agreement.)
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Significantly, the measures were introduced prior the date of the reciprocal trade review on April 2, and have therefore left markets fearful that this week’s announcements on tariffs will be at the extreme end of predicted levels.
What are the trends in bond markets and interest rates?
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Bond markets had a relatively quiet week, with benign inflation data prints in Europe injecting some calm, and thereby offsetting renewed worries about the prospect of tariff-induced price increases and supply disruptions. European short-maturity interest rates moved lower as a result, with long maturities largely unchanged.
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The US yield curve also steepened, with long rates marginally higher, while short rates remained unchanged. Market expectations for future inflation moved up somewhat as oil prices crept higher in response to rising geopolitical tensions in the Middle East. This trend should be closely monitored in the coming weeks.
What can we expect regarding new tariffs?
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This week we will get the reciprocal trade review for the US government. This will be a further step towards providing clarity about the level of new tariffs, as well as the range of industries involved, and the number of countries affected.
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Fallout from the new measures will continue beyond this week. Countermeasures will be taken by the countries affected, and we may see responses from the US to such countermeasures. We are likely to have trade-related uncertainty through – but not to any worsening extent after – the month of April.
How will the tariff policy affect economic forecasts?
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An evaluation of the degree and nature of the impact of tariffs is already emerging. Economists have begun to estimate the impact of the motor tariffs. Assuming the tariffs are passed on, US growth in 2025 is expected to be 0.2% lower due to reduced motor demand and higher prices for cars.
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This prognosis applies mainly to the first half of the year, with the economy returning to normal conditions in the second half. With each announcement, potential outcomes for the global economy begin to take shape for each region, meaning that the month of April will likely see the peak of trade policy uncertainty.
What is Goodbody’s response to these developments?
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Goodbody is monitoring the degree to which the trade policies precipitate a decline in economic activity. A significant decline would require a lower equity exposure. If markets correct too much, however, we may see an attractive opportunity to increase equity exposure. So far, we do not believe either of these developments in evidence.
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However, bond markets are likely to react in a more symmetrical manner to the price pressures and the growth impact of policy announcements. We remain of the view that risk premia in bond markets have the scope to move higher.
What relevant data was released last week?
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Last week, the main business surveys (the PMIs) were released in the developed world; despite the negative trade headlines, they improved in the US and in the euro area. In the euro area, the composite PMI output was up by 0.2 points to 50.7, driven entirely by an improvement in manufacturing sentiment. The US data was stronger, with the Composite PMI index up nearly 2 points to 53.5, but this was due to a large bounce in the Services PMI.
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Manufacturing sentiment fell last month. The survey data indicates a global economy that is still in expansion mode. However, there has been further bad news regarding consumer sentiment in the US. The Conference Board survey showed a 7.2-point drop to its lowest reading since 2013. We would concentrate on the hard data, which indicates a slowing in consumption, but not to the extent indicated by the confidence surveys.
The week ahead: what to watch out for
This week, the jobs report from the US (non-farm payrolls) will be the main release, but we also get the ISM surveys. In the euro area, the inflation report (CPI) will be the main news. Lastly, we will get the PMIs (business surveys) from China.