Please see the below article from Tatton Investment Management detailing their key takeaways from markets over the past week. Received this morning 24/03/2025.
Bracing for tariff “Liberation Day”
Capital markets were calmer last week. We said before that US investor sentiment had swung too far and could bounce back – and so it proved. This was helped by the Federal Reserve holding interest rates steady and reducing its quantitative tightening (QT) bond sales. The QT reduction is a good sign for market liquidity, and markets interpreted the Fed as dovish. US bond yields fell, which would usually weaken the dollar but, for reasons that aren’t clear, the dollar strengthened – making US stocks one of the best performers in sterling terms.
The biggest help was a quieter White House, and no new government layoffs. Even Trump’s criticism of the Fed (for not cutting rates) was tame by his standards. Simply ending the disruption won’t be enough to get markets back on side, however; Trump needs to make good on his market-friendly policies. If jobs data weakens, he just might.
The biggest geopolitical scares were outside of the US: Turkish president Erdogan imprisoned Istanbul mayor Ekrem Imamoglu, a political rival. This is a problem for Europe, which sources military hardware from Türkiye and needs stability more than ever.
We get the feeling that markets are bracing for Trump’s tariffs on 2 April – his “Liberation Day”. Tariffs could well be avoided through last-minute deals, but it’s hard to see how US demands can be met. The White House wants “reciprocal” tariffs, where this is based on its own estimate of tariff costs. But estimates will vary across countries due to different regulations and economic factors. Insisting on Trump’s version of “reciprocity” will inevitably lead to tit-for-tat.
We await to see how these will play out, but before then we have next week’s US business confidence numbers, and the UK government’s Spring Statement. If confidence numbers are bad, “Liberation Day” could be delayed.
Central Bank Update
Two central bank meetings last week, and no interest rate changes in either. The Federal Reserve held rates steady but predicted worse growth and higher inflation for 2025 – explicitly tied to Trump’s tariffs. However, this didn’t materially shift the Fed’s “dots plot” (a graph of members’ rate expectations), since chairman Powell expects tariff inflation to be “transitory”. That’s because sales tax hikes usually act like one-off cost hits, which don’t impact inflation figures beyond a year.
But it’s a big assumption to think that Trump’s tariffs will be one-offs; he’s already engaged in tit-for-tat with trading partners. Chairman Powell’s comments also avoided any mention of recently weaker employment numbers – which could become a problem if growth slows further.
The Bank of England’s (BoE) 8-1 vote to hold rates was surprisingly emphatic. The UK economy doesn’t look as weak as it did – with the expected drop in employment (in reaction to the national insurance hike) not coming through. However, fiscal policy will remain tight, with the government favouring spending cuts to fund defence, rather than new borrowing. The BoE won’t react until after the spring budget. With hawkish fiscal and monetary policy, UK bond yields could fall.
Japan held rates steady last week in a dovish move – but bond yields counterintuitively rose. This bears closer inspection, as we know from last summer that Japan’s market dynamics can quickly become everyone’s problem.
The ECB is the only central bank not in “wait and see” mode, and we expect it to remain accommodative even after historic defence spending deals on the continent. This is mainly because none of the bonds for the fund raising have actually been issued or spent yet, leaving the economy in an awkward limbo. The financial market impacts of defence spending have already happened but the economic benefit will take a while.
Markets now believe China’s demand promise
Despite Chinese stocks falling into the end of last week, investors on the whole feel good about Beijing’s stimulus plans. The government unveiled a “special action plan” for boosting consumption, rather than industrial production, which has historically been the policy target. The shift since last year has made the Hang Seng index the best performer in 2025 – though the index was also boosted by the release of low-cost AI DeepSeek. Mainland Chinese stocks (less owned by international investors and more sensitive to the domestic economy) have been less impressive.
They are still up year-to-date, however, as investors and consumers have realised Beijing’s consumption support is genuine. That’s impressive, given the global trade context: China is the only country to be consistently piled with Trump tariffs, despite the US president threatening all trading partners. Tariffs pushed down Chinese growth expectations into the start of this year, but these have recently improved. We can see this in bond yields falling then recovering. The net result is that the world’s second-largest economy is in a strong position – just not a spectacular one.
While we are positive about Beijing’s demand-side stimulus, we have always said the government’s penchant for cracking down makes China a fundamentally risky place to invest. That perception created volatility last year, but volatility is much lower this year. This is partly about Beijing’s consistent policy, but also about inconsistent policy in the US. China has historically been risky because you do not know what the policies will be tomorrow – but at the moment that sentiment arguably applies more to the US.
We shouldn’t overstate this, as perceptions could easily change. But Chinese officials are going out of their way to emphasise the nation’s consistent focus on technological and economic progress. Beijing is currently saying all the right things – and investors currently believe them.
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Alex Clare
24/03/2025