In the absence of data suggesting that a significant weakening of the US economy may lie ahead, US stock markets have begun to stabilise after a correction over the last month. Until any clear indication to the contrary, markets are supported by the view that the US administration will ultimately steer away from policy measures that could endanger the economy because of an underlying commitment to a robust business sector. America’s trading partners must hope the administration’s bark on tariffs will be worse than its bite.
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After a four-week losing streak, US stock markets began to rebound in the last week of March amid rising optimism that Donald Trump’s impending import tariffs will be less aggressive than feared. The gains come as investors take stock of the situation in the US and suggest a period of underperformance for US stocks this year may be easing.
Market sentiment was boosted by reports that the White House was considering watering down some of the tariffs expected to take effect on 2 April, previously announced as ‘Liberation Day’ by President Trump. The president said there would be ‘flexibility’ in his plans to apply reciprocal tariffs to US trading partners. This raised market hopes that regularisation and rationalisation of his tariff policy lies ahead.
Better-than-expected US manufacturing and services sector data, released on 24 March, provided investors with further reassurance. S&P Global’s flash US composite purchasing managers’ index rose to a three-month high of 53.5. Any reading above 50 suggests that most businesses are reporting growth in activity. Expansion in the services sector accounted for the rise, with manufacturing activity contracting.
In the view of our multi-asset team, concerns over a significant slowdown of the global economy appear overrated and the recent decline in equities, triggered by high uncertainty over US economic policies, creates an opportunity.
US stock valuations have adjusted downward from full valuations, earnings-per-share growth momentum remains encouraging, and investor positioning is less extreme. In this context, the team has decided to start rebuilding an overweight position in global equities for multi-asset portfolios.
No change in US policy rates
As expected, the Federal Open Markets Committee (FOMC) kept policy rates on hold at 4.25-4.50% and made it clear again that this may remain the case for some time. In their forecasts, the FOMC policymakers made upward revisions to inflation and downward adjustments to growth, suggesting expectations of a slightly stagflationary economy.
After the FOMC meeting, Fed Chair Powell repeated comments from a speech on 7 March about waiting for clarity, not being in a hurry, and parsing signal from noise – all indicating a continued hold on rate cuts is likely as the Fed assesses these risks. He also noted that little progress on inflation is expected this year and downplayed the possibility of a rate cut at the next meeting on 6-7 May.
As at the December FOMC meeting, most members expect to cut the federal funds rate to between 3.75 and 4% in 2025. That would mean two 25bp cuts this year. However, the number of committee members who expect to lower rates further has dropped to two from five and the number expecting no cut or just one more cut has doubled from four to eight. So, the committee still expects to cut twice, but there has been a significant shift toward expectations of cutting policy rates by less.
Our sovereign bond investment team continues to expect that US monetary policy will remain on hold in 2025. It expects inflation to pick up in the second half of 2025 because of tariff-related pricehikes, a tighter immigration policy, a relatively easy fiscal policy and elevated long-term expectations for inflation.
Data for US personal-consumption-expenditures (PCE) inflation in February is due on 28 March. There are some expectations for core PCE to come in as high as a rounded 0.3% month-on-month for February, up from a 0.28% reading in January, with the year-on-year rate edging up to 2.7% from 2.6%. This would be the strongest monthly reading since January 2024 – a sign of firmness in inflation that could provide further grounds for Fed policymakers to keep US monetary policy on hold in 2025.
Economic impact of reforms in Germany
On 21 March, chancellor-in-waiting Friedrich Merz’s €1tn spending package cleared its final hurdle in the outgoing parliament. The package loosens Germany’s constitutional borrowing restrictions to allow unlimited defence spending and create a special €500bn, 12-year vehicle to modernise infrastructure.
Germany’s economy has been in a long, but shallow recession, with structural issues hindering any recovery. After growth rates of -0.3% in 2023, and -0.2% in 2024, the German Ifo Institute is now estimating +0.2% for this year and +0.8% for 2026.
Germany’s economic crisis is primarily structural. In the short term, it is the US tariff announcements on 2 April that will matter as their negative impact on exports could outweigh the potential effects of domestic fiscal policy.
