Fin-X Weekly 14th April 2025

Market volatility continued last week. US equities experienced wild intraday swings and Treasury yields climbed before President Trump confirmed on Wednesday that reciprocal tariffs would be paused for 90 days.

There was one significant exception. Chinese tariffs would go ahead following retaliation, with the import levy rising to 145%.

The administration announced tariff exemptions on electronic and technology imports late on Friday.

Market volatility will likely continue around the Easter holidays, with significant data updates and earnings reports due this week. The ECB is expected to cut eurozone interest rates on Thursday.

There were wild swings in equity markets last week despite relatively good data and earnings results, showing that US banks were seeing higher trading revenues on the back of market volatility. 

After opening lower on Monday, the S&P 500 soared over 8% during Monday’s trading as a tweet suggested that US national economic adviser Kevin Hassett had said in a Fox News interview that the administration was considering a 90-day pause on so-called “reciprocal” tariffs announced on April 2nd.

The index fell back after a series of White House denials. But on Wednesday, the president did just that. He paused reciprocal tariffs on all countries except China, which was singled out after adding a 34% tariff to US imports in retaliation. After a series of tit-for-tat moves, US tariffs on Chinese imports had increased to 145% by the end of the week, while China would apply a 125% tariff to American goods, showing no signs of backing down.

Other countries that didn’t retaliate will see the base 10% tariff applied to all exports to the United States, including the EU, which decided not to apply proposed 25% retaliatory tariffs. The Trump administration left tariffs on steel, aluminium, automobiles, Canada, and Mexico in place.

Late on Friday, the US granted exclusions for phones, laptops, and other technology components so that companies have more time to move production to the US. The tariff on these goods produced in China will be reduced to 20%.

Asked by reporters why he opted to pause the tariffs for 90 days, President Trump said, “Well, I thought that people were jumping a little out of line. […] They were getting a little bit yippy, you know, they were getting a little bit afraid”.

The president has also suggested they commence negotiations with as many as 75 countries. However, trade deals can often take several years. So, agreeing 75 within 90 days seems a mammoth and probably impossible task. The eventual outcome remains far from clear.

The president did not directly attribute the pause to movements in the bond market, which had also experienced huge swings in a week that included several substantial US Treasury auctions. The US 10yr yield, for example, had dipped to 3.86% on Friday, 4th April, and risen to as high as 4.51% just four days later. The +0.65% move suggested that investors were dumping Treasuries, which created the risk that hedge funds' highly leveraged “basis trade” could rapidly unwind and exacerbate the move higher in yields.

The trade involves extracting a few basis points' difference between the US Treasury Bond cash price and the associated futures contract. The hedge fund turns to the repo market to leverage the trade to increase returns. In normal, stable markets, the strategy can be highly profitable. However, when dealer balance sheets become constrained due to large-scale selling of Treasuries, the repo leg becomes more challenging to execute, and the trade is scaled back, increasing the selling pressure in cash bonds. Several parties have raised the systemic risks posed by the practice as the number of primary dealers has declined.

On Friday, Susan Collins, head of the Boston Fed, said, “Markets are continuing to function well” and that “we’re not seeing liquidity concerns overall”. However, she said the central bank “does have tools to address concerns about market functioning or liquidity should they arise”.

The rise in yields underlined the dangers of the combination of current policies. As Republicans in Congress attempt to pass a budget that could substantially increase the government debt-to-GDP ratio, the administration's tariff policies are likely pushing the US economy into recession, undermining the tax base, and impairing the perceived “risk-free” quality of US Treasuries.

Measures of US inflation were noticeably weaker in March, according to BLS figures. Energy prices substantially contributed to the fall in the headline CPI (+2.4% yoy) and PPI (+2.7% yoy) series. But there was weakness across the board in discretionary spending categories, suggesting that consumers had already begun to pare back spending, even before the latest round of tariffs. A surprise drop in consumer credit supported that conclusion.

Even so, tariffs are expected to increase inflation readings later this year. The University of Michigan survey indicated that consumers expect CPI to be as high as +6.7% over the next year. Overall, the consumer sentiment index fell to 50.8, the second weakest reading on record.

Higher inflation expectations likely prevent the Federal Reserve from stepping in with interest rate cuts until there is more certainty that inflation will fall back towards the 2% target. More certainty could be derived from a substantial rise in unemployment and lower total demand after the tariff shock. The longer negotiations drag on, the harder it is for the Fed to cut rates and the worse the eventual slowdown will be.

While the US is applying tariffs to almost all imports regardless of origin, other countries only see tariffs applied to imports from the US, and only if they decide to retaliate. Consequently, other central banks have far more freedom to cut rates. The ECB is expected to cut eurozone rates by -0.25% to as low as 2.25% on Thursday.

According to the Melbourne Institute, Australian consumer inflation expectations rose to +4.2% yoy in April.

The RBA has said that the inflation implications of tariffs could be higher or lower. Last week, Governor Bullock said, "Inevitably, there will be a period of uncertainty and adjustment as countries respond to the ongoing tariff announcements by the United States administration. It will take some time to see how all of this plays out and the added unpredictability means we need to be patient as we work through how all of this could affect demand and supply globally".

She is not yet ready to commit to a rate cut at 20th of May meeting. However, the market has already decided that the Board will lower interest rates by either -0.25 %or -0.50%.

Governor Bullock's patience may yet prove wise. The bond market may prevent the highest tariffs from ever being implemented. At the same time, the largest Australian political parties are continuing to announce giveaways ahead of the May 3rd election. Yesterday, the Coalition announced it would support the tax deductibility of mortgage interest for first home buyers. It would, however, be limited to the first $650,000 of a mortgage over five years.

With most of the developed world enjoying a short week leading up to Easter, markets could remain volatile this week. More trade announcements seem highly likely. The US will also publish retail sales and industrial production figures, China will release Q1 activity data, and Australian employment figures are due out on Thursday. The global earnings season also continues, with 48 of the world’s largest companies due to report.