Tariffs and Trillions: US Trade Turmoil Meets German Fiscal Firepower

April Market Update with Rob Hogg, CIO and Head of SGH Individual Portfolios

 

Trade Turmoil  |  United States   |   Canada  |  Europe  |  China   |   Australia   |   Outlook  |   Podcast

 

In this monthly update we look at:

• US “exceptionalism” questioned amid diverging trends in growth expectations for the US compared with Europe and China.
• Might there be a Trump or Fed “put” given the current slide in equity markets?
• USD’s role as a safe haven seems to have changed during the current market volatility.
• Forward-looking US sentiment surveys are softening.
• Will the US economy weaken in line with the sharp declines in sentiment and expectations? Not yet it seems.
• One policy that seems to be working positively for the US economy is lower US gas prices.
• Citing “tariff worries” the Bank of Canada cut its policy rate by 0.25% to 2.75% in March.
• German fiscal policy developments have a significant impact on continental European bond markets.
• Chinese economy’s improving trend continues.
• Australian CPI drifting in the right direction (gently downward) for the RBA to cut rates in coming months.
• Australian employment surprises on the downside.

 

| Tariffs and Trillions: US Trade Turmoil Meets German Fiscal Firepower

President Trump’s announcements regarding tariffs were again key to market movements during the month. German fiscal spending announcement was also a factor (more so for continental European markets)

 

Equity markets continued to be buffeted by Trump’s announcements regarding tariffs during March and, as the month ended, uncertainty was heightened ahead of upcoming tariff announcements scheduled for April 2 – a day Trump has called “Liberation Day”.

Confusing markets during March were statements with seemingly contradictory sentiments and intentions:

• In a conciliatory manner, Trump announced on 24 March, that ‘‘I may give a lot of countries breaks” from potential tariff measures.
• But in a much less conciliatory manner, on 27 March the administration announced 25% tariffs on auto and auto parts imports into the US (which caused the stock prices of key US auto manufacturers to slump).

Reflecting the uncertainty emanating from the administration’s tariff announcements, US equity markets fell sharply over the month with other global equity markets generally lower also.

Apart from the US where yields were little changed over the month, most global bond markets ended weaker with yields rising globally (ex. the US) – it seems that “safe-haven” flows (investors selling risky assets such as equities and investing into defensive assets such as government bonds) were not enough to prevent most global yields from rising.

Pressuring European yields higher over the month was the German parliament’s passing of a very significant fiscal spending program which led to a sizeable increase in German (and other Euro-zone) bond yields over the month. Japanese yields also drifted higher over the month as investors continued to price further upward convergence of Japanese inflation and policy rates toward global averages.

Over the full month US 10-year bond yields were near unchanged at 4.21% (end-month to end-month) after trading in a relatively narrow range, while 10-year Australian yields rose just 0.09% to 4.39%.

The Australian dollar finished the month little changed at USD 0.6250.

 

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| Equity Markets Slide Globally as Uncertainty Spikes

We noted last month that our previously held cautious optimism about the market outlook had been downgraded with us becoming more cautious owing to the risks arising from the new US administration’s policy announcements. These announcements have been driving greater investor, corporate and household uncertainty.  We felt that this uncertainty, against a background of relatively expensive global and Australian share markets, could lead to further market weakness, especially if the US (and other countries) were to enter recession caused by rising uncertainty.

During March policy uncertainty seemed to rise even further with equity market weakness the understandable response. While the falls in US and other global markets in March have priced-in some of this uncertainty, and its potential negative impact on the economy and earnings, there remain not insignificant ongoing downside risks to the outlook, especially if the uncertainty continues or heightens further.

Ahead of Trump’s “Liberation Day” on April 2, we remain cautious – but note that so far it is sentiment surveys (“soft” data) not actual underlying real economy data that have displayed weakness against a background of rising policy uncertainty. It is these “soft” data releases that have had most impact on equity market sentiment.

Sentiment data – even forward-looking orders expectations – are not always a good guide to future macroeconomic trends.

But if policy uncertainty continues for more than the short term, the likelihood of weaker sentiment leading to weaker economic outcomes would increase.

In Australia, the continued downward drift in inflation will likely enable the RBA to cut rates again in coming months. Barring a minority government outcome at the upcoming election, further potential rate cuts will probably add to the slight uptick in domestic growth momentum that we have witnessed in recent months.

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| United States

US “exceptionalism” questioned as investor expectations for growth prospects in the US deteriorate.

Calendar 2025 has unfolded in a manner quite different to what had been expected by most investors at the end of 2024.

The end of 2024 was marked by investor euphoria regarding US growth prospects (as described by the term US “exceptionalism”), while expectations for continental Europe and China were very pessimistic. At that time, we noted at that for this gap in expectations to close in 2025, the US only needed to slightly disappoint investors, and the Eurozone and China only needed to be less terrible than expected.

And this seems to be what has occurred:

• There has been a sharp downward adjustment of expected US growth (reflected in trends in US equity pricing and the USD) seemingly owing to tariff announcement volatility and the environment of broader policy uncertainty created by the new Administration.
• There has been a sharp re-rating higher in the expected “fiscal impulse” in Germany, with an associated uplift to Euro area growth views.
• Sentiment toward China has also moved less pessimistic as data has been more promising and China has not been targeted by tariffs any more than expected.

These diverging trends can be seen in the graph below from Goldman Sachs that charts the diverging views of equity investors regarding economic and earnings prospects in the US, Eurozone and China.

Diverging equity market “growth factors”

 

Might there be a Trump or Fed “put” given the current slide in equity markets?

An increasing number of investors are wondering whether the current equity market weakness might invoke a Trump or Fed “put” – a policy announcement by the Trump administration or a Fed policy rate cut (or similar) designed to support market sentiment.

On the prospects for a Trump put, so far there are no signs of this occurring with Treasury Secretary Bessent describing market weakness in early March as a much needed “detox” (Reuters, March 7). Instead, the administration seems more focused on oil (lower), US rates (lower), and the USD (at least not higher).

For the Fed, the continued relative resilience of the economy and the only glacially slow improvement in inflationary pressures suggest no near-term likelihood of a rate cut (market pricing is for a cut by the June 18 FOMC meeting). A downturn in the labour market would likely be required for the Fed to act more swiftly than currently expected.

 

USD’s role as a safe haven seems to have changed during the current market volatility

The source of currently rising investor concerns is concentrated on the US, driven primarily by the policy uncertainty surrounding the Trump Administration. Interestingly, as global share markets have reacted negatively (more so in the US than elsewhere), the US dollar (DXY Index) has fallen in value against a range of key currencies, and against the AUD is relatively little changed.

Citi analysts, observing the USD’s recent trading dynamics, have posited that with the US current account deficit financed increasingly by inflows to US equity markets (rather than inflows to US government bonds), a downturn in US equities could nowadays lead to a fall in the USD, in contrast to what has more often occurred historically where the USD has often been a beneficiary of “safe-haven” flows. In the recent experience, instead of seeing flight-to-safety flows into the US when equities sell off, there seem to have been asset allocation flows out of the US, and subsequent USD weakness.

This has important potential implications for AUD-based investors – it has usually been the case historically that losses from global equity market drawdowns (if unhedged by AUD-based investors) would be mitigated somewhat by a fall in the AUD/USD exchange rate. But this hasn’t occurred in the current episode.

The chart below produced by Citi shows that the stock of net foreign ownership of US equities has turned from negative to positive such that, post pandemic, the US is now an importer of equity capital. As noted above, this structural shift has important implications for the USD in risk-off market episodes because equity selloffs now seem to correspond to US capital outflows.

 

US net international portfolio investment position

Forward-looking US sentiment surveys are softening

As we noted last month, the initial months of the Trump administration have been marked by considerable volatility in markets and sentiment surveys, with markets and sentiment reacting most to the administration’s comments about trade and tariffs. Both corporate and consumer sentiment has been impacted.

US Corporate sentiment

During the month a key measure of corporate sentiment – the S&P Global “Flash” US PMI – revealed that, while output growth in March remained positive, confidence in the outlook deteriorated further. Business expectations for the year ahead fell to their second lowest since October 2022 as companies grew increasingly cautious about the economic outlook, often citing worries over customer demand and the impact of aspects of the new administration’s policies.

Input price inflation accelerated sharply, especially in manufacturing, to a near two-year high, often attributed to the impact of tariff policies.

 

US S&P PMI Future Output Expectations Indexes

US Consumer Sentiment

Consumer sentiment continued to shift sharply lower in March. The Conference Board’s measure of Consumer Confidence declined for a fourth consecutive month in March, falling below the relatively narrow range that had prevailed since 2022.

The Conference Board noted that

“Consumers’ expectations were especially gloomy, with pessimism about future business conditions deepening and confidence about future employment prospects falling to a 12-year low as worries about the economy and labor market have started to spread into consumers’ assessments of their personal situations.”

 

US Conference Board Consumer Confidence

 

Another consumer sentiment survey (compiled by the University of Michigan) was similarly gloomy revealing that sentiment fell in March for the third straight month, declining 12% from February.

Sometimes seen as a leading indicator, the expectations index from the consumer sentiment survey plunged a 18% in March and has now lost more than 30% since November 2024.

 

More concerning for policy makers is the fact that, even as sentiment is weakening, inflation expectations are rising with the sentiment survey finding that consumers’ year-ahead inflation expectations rose from 4.3% in February to 5.0%, the highest reading since November 2022. Long-run inflation expectations are also rising, moving from 3.5% in February to 4.1% in March.

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Will the US economy weaken in line with the sharp declines in sentiment and expectations? Not yet it seems

To judge the ongoing health of the US economy, measures of actual activity (rather than surveys of sentiment) can provide a guide to actual hiring and investment decisions.

US Weekly Jobless Claims

The health of the labour market can be assessed by reference to the weekly initial jobless claims report which provides a real time guide to hiring and firing.

This report still suggests ongoing positive momentum in the US economy with no sign of deterioration to date in either the weekly or moving average measures of unemployment claims.

US Initial Unemployment Claims

US Durable Goods Orders

Another measure of actual spending is the durable goods orders report which charts investment spending by US corporates. This measure also suggests that economic growth is continuing with investment spending orders in February moving ahead after a significant uptick in January.

Durable Goods New Orders (monthly % change)

 

One policy that seems to be working positively for the US economy is lower US gas prices

Part of President Trump’s agenda includes lowering inflation. One direct way to do this is via lower gas (petrol) prices (an outcome of lower oil prices), and this seems to be occurring as measured by the average price of gas across the US.

This measure of gas prices is lower (for this time of the year) than it has been in the past few years with the current national average for a gallon of gas at $3.15, 38 cents lower than a year ago.

US National Gas Price Comparison (2022-2025). As of March 20, 2025

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| Canada

Bank of Canada cut its policy rate by 0.25% to 2.75% in March, citing “tariff worries”

The Bank of Canada lowered its policy rate by 0.25% during March citing caution on the outlook, given uncertainty surrounding trade policy and its potential impact on the Canadian economy.

The statement noted:

“While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing US tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest. Against this background…Governing Council decided to reduce the policy rate by a further 25 basis points.”

 

and

“Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity, while also increasing prices and inflation.”

 

Bank of Canada Policy Rate

 

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| Europe

German fiscal spending policy has a huge impact on continental European bond and equity markets

We noted earlier that investor expectations for growth in Europe have improved significantly in recent months. A significant driver of the upgrade to expectations for European growth in March was a new German fiscal package that is expected to lead to the setting up of two off-budget funds for defence and infrastructure, amounting to EUR 400 billion and EUR 400-500 billion respectively, or about 20% of GDP jointly. Together, these two funds will constitute the largest fiscal expansion by any German government since reunification.

Initial reports of this policy change led to a sharp rise in German bond yields early in the month (a move which spread across all continental European bond markets) and a significant boost to the German equity market. Reflecting the significance of this fiscal package, 10-year German bonds rose by 0.33% over the month

With the implementation of these two funds, the contribution of government spending to European growth is expected to move from being negative to significantly positive, hence the increase in German bond yields over the month.

Euro Area Fiscal Impulse

 

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| China

Chinese economy’s improving trend continues

As we’ve noted previously, 2024 ended with overwhelming negative sentiment surrounding Chinese growth prospects. Given these expectations, not much improvement was likely to be required to see economic and market performance surprise positively (indeed an end to negative surprises would have been enough).

And this seems to be occurring – at the end of March we saw reported yet another upside surprise in a key manufacturing and services survey produced by China’s National Bureau of Statistics (NBS):

China’s NBS manufacturing PMI rose slightly further to 50.5 in March from 50.2 in February.

Among the major sub-indexes, the new orders sub-index increased the most, rising to 51.8 from 51.1.

The NBS non-manufacturing PMI increased to 50.8in March from 50.4 in February.

NBS Manufacturing Purchasing Managers’ Index (PMI)

 

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| Australia

Australian CPI drifting in the right direction (gently downward) for the RBA to cut rates in coming months

Moving in the right direction to give the RBA the opportunity to cut rates again in a few months (market has nearly fully priced an April cut), the monthly CPI indicator rose 2.4% in the 12 months to February, following a 2.5% rise in the 12 months to January.

Underlying measures, such as the CPI excluding volatile items and holiday travel, and the trimmed mean measure also displayed a decelerating trend in February, moving to 2.7% (from 2.9%) and to 2.7% (from 2.8%) respectively.

The continued gentle downward drift in inflation is expected to give the RBA room to cut rates again in coming months. This will likely further assist to boost activity in coming months.

Australian Monthly CPI

 

Latest employment report surprised on the downside

…but the unemployment rate remains low.

The number of people employed fell by 52,800 in February but the unemployment rate was unchanged at 4.1%. An unusual quirk in the numbers caused by fewer older workers returning to work in February contributed to the fall in employment.

Of all the numbers in the monthly release, the unemployment rate is viewed as the most reliable and, at 4.1%, remains low by historical standards, suggesting that employment conditions remain healthy.

Unemployment Rate (%)

 

Significant corporate events during the month

James Hardie (JHX)

On 24 March, building company James Hardie Industries announced the acquisition of the US-based AZEK for a combination of cash and James Hardie shares with a total transaction value of USD8.75 billion.

Aaron Erter, James Hardie’s CEO described the acquisition as

“an extraordinary opportunity to accelerate our growth strategy, deliver enhanced and differentiated solutions to our customers and drive shareholder value.”

The share market didn’t see it quite so positively, sending JHX shares around 14% lower on the day.

Market participants seemed to be very skeptical about the deal given the price paid, the dilutive effect on returns, the long-dated nature of synergies, and questions around AZEK’s competitive advantage.

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