A more market friendly tone from the Trump administration on trade and Fed independence saw US assets finding form this week, with spillover effects across broad markets. Benchmark US equity indices rallied between 4.6% and 6.7% this week, bringing the S&P500 to within 2.6% of its April 2 'liberation day' level; the Nasdaq, meanwhile, has more than recovered its recent falls to be around 1.3% higher over that period. However, despite the improving equity performance, a risk premium remains embedded in the USD, with the DXY index more than 4% lower since liberation day. A weaker dollar hurts the US economic outlook through higher imported goods prices in addition to the tariffs. Consequently, the expectation for Fed easing is reflected in the front end of the Treasury curve, with the 2-year yield trading at 3.75% - down from around 4.3% at the start of the year.
In a holiday-shortened and much quieter week for headlines, markets looked to the preliminary readings of April's PMI surveys as a guide on the early impacts of President Trump's tariff announcements on activity. In the US, activity on the headline gauge fell from 53.5 to 51.2, indicating growth slowed in April to a 16-month low. More significantly, prices paid spiked - the inflation rate in the manufacturing sector lifted to its fastest pace in 29 months - as firms reported facing higher import prices and pressures from labour costs. The tariff impacts were less visible in the euro area - headline activity in the bloc eased from 50.9 to 50.1 - but in the UK export orders slumped by their most in almost 5 years, sending the headline index into contraction (48.2) for the first time in 18 months.
The overall picture that tariffs will weigh on growth was reflected in downgrades to the IMF's global growth forecasts. The group cut its projection for growth this year from 3.3% to 2.8%, with the US outlook slashed from 2.7% to 1.8%. It also raised its probability for a US recession in 2025 to a 37% chance. The expected effects of tariffs on inflation are much more uncertain: although the IMF noted that weaker global growth will lead to disinflationary forces, tariffs are a supply shock that weighs on productivity and decreases competition, pushing up production prices - as the PMI data showed this week.
