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Investors’ focus is unlikely to waver in the coming week from Donald Trump’s trade war.
After the US president’s blitz of tariffs sparked a global sell-off this week — in a rout that intensified when China retaliated with 34 per cent tariffs of its own — markets will be highly sensitive to any signs that the trade confrontation is escalating.
China’s response “makes a near-term deal to end the trade war between the two superpowers highly unlikely”, said Leah Fahy at Capital Economics.
Wall Street stocks suffered their worst day since 2020 on Thursday as the S&P 500 tumbled 4.8 per cent. Equities around the world were also swept up in the sell-off. The S&P 500 shed 6 per cent on Friday.
Oil prices have also dropped sharply as traders price in a global economic slowdown or recession.
George Saravelos, head of foreign exchange research at Deutsche Bank, said that central banks might be able to help stop the selling with a more dovish message. However, the Federal Reserve is likely to be constrained because of the inflationary pressures unleashed by tariffs, he added.
“Unless President Trump reverses the tariffs, we believe there is only one answer to a sustained circuit-breaker to this trade shock: fiscal policy,” Saravelos said. “The countries that respond the quickest and most forcefully to this shock are those whose currencies will probably be the most resilient.” Alan Livsey
Will CPI data show US inflation slowing in March?
The US is expected to report a slowdown in inflation in March, which economists say could be the low point for the consumer price index this year if the US president’s tariffs are enacted.
The Bureau of Labor Statistics on Thursday will release the latest US CPI report, which is forecast to show that headline inflation rose 2.6 per cent in March year over year, according to economists polled by Bloomberg. That is lower than February’s 2.8 per cent rate.
Core inflation, which strips out the volatile food and energy sectors, is expected to be 3 per cent year over year, compared with 3.1 per cent the month prior. The dip in core inflation should be helped by lower used-car prices, according to Barclays economists, after six months of increases.
This data would reveal a benign US inflation environment prior to the tariff announcements. The Fed’s cautious loosening of monetary policy since its September reduction in its fed funds rate, the first in two years, has so far helped control inflationary pressures.
But the outlook for US inflation has changed significantly since the announcement of Trump’s “reciprocal” tariffs last week, and the concern about retaliatory measures from China and perhaps Europe.
“If in line with our forecast, this could be one of the softest inflation prints we receive this year, before tariff effects kick in. The “liberation day” tariffs announced on April 2 were materially higher than our baseline assumption, and foreshadow incremental inflation pressures this year,” wrote Barclays economists, led by Pooja Sriram. Kate Duguid
Is China still flirting with deflation?
China has had a different problem with consumer prices of late; they are falling. In February for the first time in more than a year, prices declined 0.7 per cent year on year, exacerbating fears of deflationary pressures weighing on the world’s second-largest economy.
The latest data on Thursday is expected to show that consumer prices were steady year on year in March, according to economists polled by Reuters. Citi analysts believe price momentum remained weak after lunar new year celebrations, with both food and non-food segments on a downward trajectory.
Price deflation is a tricky policy challenge for any country as it leads consumers to delay spending and businesses to stall investment decisions. China’s economy has for years been weighed down by the bursting of a property market bubble and an official deleveraging drive. Consumers have remained cautious on spending since the end of the Covid-19 lockdowns two years ago.
Nevertheless, investors will look for evidence that Beijing’s stimulus package announced in September has had some effect. Last week, first-quarter GDP data positively surprised. “Historically, stimulus packages in China tend to be front-loaded,” wrote Morgan Stanley in a report. “Indeed, we have seen improved data from government linked FAI [fixed asset investment] and durable consumption on the back of trade-in incentives.”
However, analysts from Standard Chartered are more pessimistic about deflation, forecasting that CPI will remain negative driven by falling food and fuel prices.
If that is the case then pressure will mount on Beijing to accelerate its stimulus plans to reboot the economy and mitigate the damage from significantly higher US tariffs as well as its domestic deflationary pressures. Arjun Neil Alim
