US Markets Struggle Amid Economic Concerns And Tariff Pressures

US equity futures declined, and Treasuries saw an uptick as mounting concerns about the US economy dampened investors’ risk appetite. S&P 500 futures dropped by 0.8%, following the worst week for the index since September. Asian markets also saw losses, and in Europe, the Stoxx 600 index quickly reversed an early 0.5% gain.

The dollar hovered just above its lowest level since November as confidence in continued US economic outperformance waned. Treasury yields fell across all maturities as investors shifted towards the relative safety of fixed income assets. Meanwhile, gold saw a modest increase, while oil prices slumped to near their lowest point since September, compounded by weak economic data from China that fueled concerns about global demand.

Economic Slowdown Fears Escalate Amid Tariffs and Job Cuts

Several factors are now pointing to a potential slowdown in the US economy, which had been outperforming both China and Europe for months. Concerns have been growing around the impact of tariffs on major trading partners, a higher unemployment rate, and cuts to the federal workforce. These developments are raising fears that the US economy could be headed toward a growth stall. Bond traders are signaling an increased risk of economic stagnation, and President Donald Trump acknowledged that the economy faces “a period of transition.”

Ed Yardeni, president of Yardeni Research, expressed concerns, stating, “It’s getting harder to make out the shape of the economy through the fog of Trump 2.0’s firings and tariffs.” He noted that it is no surprise that the stock market’s default position is “risk-off,” with stocks in correction mode.

Treasury Market Shifts as Investors Bet on Rate Cuts

In the bond market, traders have increasingly turned to short-dated Treasuries, pulling the two-year yield sharply lower since mid-February. The move reflects expectations that the Federal Reserve may cut interest rates as soon as May in an effort to shield the economy from further deterioration. This marks a dramatic reversal in the Treasury market, where the US economy had previously shown resilience despite weaker global growth.

Federal Reserve officials have acknowledged rising uncertainty in the US economy. Mary Daly, president of the Federal Reserve Bank of San Francisco, warned that growing business uncertainty could dampen demand, though she noted that no immediate changes to interest rates were necessary. Similarly, Fed Chair Jerome Powell emphasized that inflation pressures from tariffs could be temporary, despite concerns about rising uncertainty.

Analysts Cautiously Assess Risk Assets Amid Rising Volatility

JPMorgan Chase analysts, led by Fabio Bassi, issued a cautious outlook on risk assets, citing heightened policy uncertainty, volatility surrounding the Russia/Ukraine conflict, and shifts in Germany and the EU’s fiscal plans. This uncertainty has led to a significant adjustment in positions, with the market experiencing considerable volatility over the past fortnight.

Market observers have also been questioning whether the Trump administration will revise its tariff strategy as the stock market faces downward pressure. Some believe that a significant market decline could prompt the president to shift his policies, fearing the negative impact on investor sentiment.

Job Growth Steady but Unemployment Rate Creeps Higher

US job growth remained steady in February, with nonfarm payrolls increasing by 151,000. However, the unemployment rate edged up to 4.1%, signaling potential challenges ahead. Tariffs and the broader economic policies under President Trump are now beginning to exert pressure on equity markets, while concerns around US growth are intensifying.

Rupal Agarwal, an Asia quantitative strategist at Sanford C. Bernstein, noted that inflationary pressures could soon resurface, with the risk of heading toward stagflation — a period of stagnation coupled with rising inflation. She cautioned that while it may be too early to declare a recession, the US economy is showing signs of slowing.

China Faces Deflationary Pressures, Tariff War Escalates

In Asia, China reported a surprising drop in consumer inflation, which fell below zero for the first time in 13 months, underscoring persistent deflationary pressures. This development raised concerns among investors, who will now closely monitor the effectiveness of China’s stimulus efforts in stimulating domestic demand. In Hong Kong, the Chinese stock market experienced a 1.9% decline, and Chinese technology stocks dropped by 2.1%.

“The market is still concerned over the dis-inflation pressure in China, which may contribute to near-term corrections in equity indexes,” said Jason Chan, senior investment strategist at Bank of East Asia. “In the medium term, however, inflation data could improve, fueled by fiscal stimulus and a recovery in the property market.”

Separately, China announced it would impose retaliatory tariffs on Canadian imports of rapeseed oil, pork, and seafood, escalating the ongoing trade war. The announcement caused significant volatility in commodity markets, with canola prices plunging.

Political Developments in Canada and Key Economic Events Ahead

In Canada, Mark Carney emerged as the victor in the race to become the next prime minister, potentially influencing economic policy moving forward.

Looking ahead, key events this week include industrial production data from Germany, Japan’s GDP report, and various US economic indicators, such as job openings and inflation figures. These events will provide further insights into the state of the global economy.