Will the Fed come to the rescue?

What a week for financial markets. After Thursday’s historic sell off in risky assets, the selloff has gathered speed on Friday after China retaliated with  tariffs of 35% against all US goods imports. The President, who is surely feeling the heat from the stock market sell off, doubled down on his trade programme, and said that his policies will never change. This leaves the Fed to do the heavy lifting and try to calm financial markets. Fed chair Jerome Powell will speak later this afternoon, and it would disingenuous not to focus on the stock market sell off and thee impact on tariffs.

Is a Fed rate cut possible?

The best way for risk to recover if Trump is not going to reverse his trade policies, is for the Fed to embark on an emergency rate cut. The interest rate futures market has seen expectations for an April rate cut by the Fed surge in the last 24 hours,  the probability of a rate cut later this month is now more than 40%, it was 18% before the tariff announcement on Wednesday. Could Jerome Powell fuel expectations of a rate cut even more later today? That will be the focus. If stocks continue to decline, then this could be Powell’s ‘whatever it takes’ moment to help prop up US markets.

Stronger payrolls barely impacts risk sentiment

However, the stronger than expected payrolls number for March could make it hard to cut rates unless things get worse from here.  The US created 228k jobs last month, easily beating expectations for a 140k increase. The education and health sectors created the most jobs last month, while the leisure and hospitality sectors also contributed to payrolls growth, and even government saw an increase in payrolls last month. Trade and transport also created 48k jobs last month, however this may not continue after the President’s announcement of his reciprocal tariffs, which are expected to curb trade with the US in the coming months.

The unemployment rate ticked up a notch to 4.2% from 4.1%, but not by enough to spook the Fed, and wage growth ticked lower to 3.8% YoY from 4%. This was a mixed report, but it feels very out of date due to the immense sea change that we have seen in the aftermath of the tariff announcements. Bloomberg is still forecasting a 30% chance of a US recession in the next 12 months, however, some analysts are predicting the chance of a recession is more like 50%.

Recession risks stack up

Risk assets are getting close to recession territory. US stocks have sold off for the second day. The Dow Jones and the S&P 500 are both down more than 3%. Financial markets are heaping the pressure on the US authorities to intervene and stop the pain from the steep sell off.  The Nasdaq is approaching bear market territory and is down 17% YTD, the Nikkei is also down 15% on a USD basis. European stock markets are faring better due to their strong start to the year, although the CAC 40 has fallen into negative territory for the year so far. The Eurostoxx 50 index and the FTSE 100 have seen their year’s gains eroded in recent trading sessions in USD terms.

The FX view

The dollar is mostly holding onto its gains on Friday, as it tries to recover post Thursday’s epic sell off. The dollar is still the world’s reserve currency, so after a sharp fall it will naturally bounce back as it is necessary for global trade and the trade of commodities. The dollar is still falling against the yen and the Swissie, as these two currencies act like a safe haven during this time of unprecedented volatility.

Will tariffs be tougher to digest than Covid?

The sell off in European shares gathered pace on Friday after China announced retaliatory tariffs. We could expect another leg lower in risk assets if the EU does the same, as it is threatening to do. The rapid recalibration of US and global growth expectations has weighed heavily on commodity prices this week. The oil price is down 6.7%, and Brent crude oil is testing $65 per barrel, after falling through this level earlier. The copper price is also down by 5%, the steepest decline since 2022. These moves in stocks and commodities remind investors of Covid times, back then the Fed came to the market’s rescue, will it do the same this time? The issue for stocks and other risky assets is that there’s no vaccine to immunize against the impact of tariffs, so that could be a trickier problem to solve than a global pandemic.