Trade war and uncertainty persists, economic projections continue to slide

Trade negotiations

Uncertainty around the global trade war persists as investors await news regarding negotiations with foreign trade partners. President Trump and U.S. Treasury Secretary Scott Bessent commented throughout the week that negotiations are going well. Bessent stated that 145% tariffs on China are unsustainable, and he expects a de-escalation in the trade war. Trump also specified that the U.S. is actively negotiating with China and alluded to hopes of a deal that would substantially reduce tariffs. China refuted these claims of discussions and called for the U.S. to remove all unilateral tariffs. Trump subsequently assured the media that negotiations are, in fact, underway. High tension between the U.S. and China has contributed to the continued uncertainty around the future of trade relations between these two global powers.

Although most of the attention has focused on the status of the China negotiations, other countries have reportedly been working towards trade deals, including India, Norway, and South Korea. Bessent also hinted that the U.S. and South Korea may reach an agreement soon, telling reporters, “We may be moving faster than I thought.” Furthermore, news emerged that Trump is considering exemptions for automakers from some tariffs on imported auto parts, similar to the tariff relief recently announced for semiconductors and consumer electronics.

Fed member projections and Powell's job security

Last week, the market started with uncertainty around Fed Chair Jerome Powell’s job security. The prior week had ended with President Trump expressing frustration over Powell’s reluctance to cut rates, saying that his “termination can’t come fast enough.” While economists and market participants debated whether Trump could fire Powell, capital flowed away from U.S. dollar-denominated assets with a continued sell-off in the S&P and U.S. treasuries as questions about the Federal Reserve’s independence grew. The market gained clarity Tuesday evening when Trump announced that he had no intent to fire Powell. The S&P and treasuries both rallied at the market open on Wednesday morning following the news.

Other Fed members drew attention last week by discussing their outlook on the U.S. economy, including Fed Governor Christopher Waller. Waller believes that layoffs may ramp up quickly if the Trump administration reinstates aggressive tariff rates, and he stated that he would support rate cuts if unemployment rises materially, reiterating his view that inflation caused by the tariffs would likely be temporary. Cleveland Fed President Beth Hammock also weighed in last week with a view that rate cuts can come as early as June if there is clear evidence of the economy’s direction.

Economic data and projections

The IMF cut its U.S. growth projection for 2025 to 1.8%, down from the 2.7% projection in January due to the implications of the tariffs. They now reportedly expect a stagflationary environment and increased their odds of a U.S. recession from 25% to 40%. In addition to decreased U.S. growth, the IMF project a slowdown of the global economy, showing a 2.8% global growth forecast, down from the prior 3.3%.

While economic data was light last week, there were some notable points. S&P Global PMI came in mixed, with strong manufacturing and weak services numbers. Jobless claims showed resilience in the labor market, with initial claims meeting expectations and continuing claims slightly lower than expected. Durable goods orders from March came in higher than any economist forecast at 9.2% versus the surveyed 2.1%, likely driven by auto and aircraft companies front-running the tariffs since new orders excluding transportation remained virtually unchanged. Lastly, University of Michigan consumer sentiment came in higher than expected but lower than the prior reading, continuing the downtrend. 1-year and 5-year inflation expectations also trended higher. The 1-year inflation expectations for April ticked up by 1.5% since last month’s reading at 6.5% versus the expected 6.7%, and the 5-year inflation expectations came in at economist expectations of 4.4%, which is a 0.3% increase from the prior month’s reading.

The week ahead

We have plenty of economic data coming this week, including JOLTS job openings, PCE, GDP, jobless claims, nonfarm payrolls, and the unemployment rate.