Global Markets Weekly Wrap KW 13 : U.S. Stocks Drop Amid Trade Uncertainty, Inflation, and Growth Worries

The U.S. stock market experienced a decline throughout the week, mainly influenced by weaknesses in the technology and communication sectors. However, stocks categorized as value investments continued their trend of outperforming growth-oriented shares for the sixth straight week. At the beginning of the week, traders from T. Rowe Price observed a degree of cautious optimism among investors, as markets demonstrated modest but positive movements. The sentiment was driven by speculation that the U.S. government might take a more measured stance on imposing new tariffs.

However, as the week progressed, multiple tariff-related announcements disrupted market confidence. On Wednesday, President Trump declared a 25% tax on all automobiles not manufactured in the U.S. This announcement, combined with rising concerns about an economic slowdown and weakened consumer sentiment, negatively impacted stocks, ultimately pushing major market indexes into the red.

Economic reports added to investor concerns. The Bureau of Economic Analysis revealed that its key inflation metric, the core personal consumption expenditures (PCE) price index, increased by 0.4% in February, compared to 0.3% in January. Inflation-adjusted consumer spending rose only 0.1%, falling short of the projected 0.3% increase. On an annual basis, the core PCE surged by 2.8%, which remained well above the Federal Reserve's target of 2%. This data release contributed to stock market declines on Friday, leading to one of the weakest weekly closes.

Consumer confidence took a hit as well. The Conference Board's consumer confidence index fell for the fourth consecutive month in March, dropping to 92.9 from 100.1 in February. The expectations index, which evaluates consumers' short-term outlook on personal income, business conditions, and the labor market, decreased by 9.6 points to 65.2—the lowest level in over a decade. The index remained under 80 for the second consecutive month, a threshold often viewed as an early warning sign of a potential recession. The report highlighted that optimism regarding future income had largely disappeared, signaling that economic concerns were increasingly affecting individuals' perceptions of their financial well-being.

Similarly, the University of Michigan's Consumer Sentiment Index showed a steep decline. The final March reading plummeted by 12% compared to the previous month, settling at 57.0. The expectations component dropped by 18%, reflecting growing anxiety about potential economic turmoil driven by ongoing policy changes. Moreover, inflation expectations for the upcoming year climbed from 4.3% in February to 5.0%, marking the highest level since late 2022 and the third consecutive month of increases.

Despite declining confidence, business activity accelerated in March. S&P Global reported that its Flash Composite Purchasing Managers' Index (PMI) rose to 53.5, signaling growth in the private sector, particularly in services. However, the manufacturing sector saw an unexpected contraction, and the outlook for future business conditions weakened. Many businesses cited concerns over customer demand and policy changes as reasons for their pessimism. Additionally, input costs surged at the fastest rate in nearly two years, driven by tariffs and labor expenses.

In the bond market, U.S. Treasury yields saw fluctuations. Initially, yields rose across various maturities due to ongoing uncertainty surrounding trade policies. However, by Friday, yields declined as investors became increasingly wary of economic conditions. Municipal bonds struggled, reflecting seasonal trends. Meanwhile, investors in high-yield corporate bonds remained cautious about tariff-related developments, although technical conditions continued to support the asset class overall.

The decline in stock indexes was evident in major benchmarks. The Dow Jones Industrial Average ended the week lower, while the S&P 500, Nasdaq Composite, and other key indexes posted losses as well. This downturn underscored growing investor concerns regarding trade policies, inflation, and economic growth.

Across the Atlantic, European stock markets also faced downward pressure. The STOXX Europe 600 Index declined by approximately 1.4% following the announcement of new U.S. trade tariffs. European markets had started the week positively, buoyed by economic updates and geopolitical developments. However, stocks fell after Trump imposed a 25% tariff on all auto and auto parts imports. This broad measure disappointed European investors who had hoped for exemptions for certain nations. The U.S. president later warned of additional tariffs if the European Union retaliated with countermeasures.

Despite trade tensions, there were positive signs in the eurozone's private sector. March marked the third consecutive month of expansion, with the services sector maintaining growth and manufacturing production increasing for the first time in two years. Germany's business sentiment also improved, as reflected in the Ifo Business Climate Index, which reached its highest level since mid-2024. Additionally, geopolitical news provided some encouragement. Talks between Ukraine and the U.S. were described as constructive, and a partial ceasefire agreement was reached, reducing hostilities in the Black Sea and protecting energy infrastructure.

In the United Kingdom, economic concerns mounted. Chancellor Rachel Reeves delivered the Spring Statement, confirming new spending cuts. The Office for Budget Responsibility (OBR) revised its 2025 economic growth forecast downward to 1% and predicted rising unemployment and inflation. However, the agency provided a more optimistic outlook for the years beyond 2025. February inflation data offered some relief, coming in lower than expected at 2.8%, down from 3% in January. This left room for the Bank of England to consider a potential rate cut in May.

Japan's stock markets also ended the week in negative territory. The Nikkei 225 and the TOPIX Index recorded losses, driven by the impact of Trump's newly imposed auto tariffs. These tariffs, set to take effect in early April, threatened Japan's key automotive industry, which accounts for a significant portion of its exports to the U.S. The announcement led to fears of potential retaliatory measures from trading partners. Meanwhile, the yen weakened against the U.S. dollar amid expectations that the Bank of Japan might delay further interest rate hikes.

Japan's Prime Minister Shigeru Ishiba warned that the latest U.S. tariffs would significantly affect the country's auto industry and overall economy. He emphasized that Japan would explore all possible responses, including diplomatic negotiations for an exemption. In the bond market, the yield on Japan's 10-year government bond increased, influenced by central bank statements indicating that interest rates could rise if inflationary pressures persist. Tokyo-area consumer inflation rose in March, driven by rising food prices.

In China, stock markets remained relatively stable throughout the week, with only minor changes in major indexes. The CSI 300 Index showed slight gains, while the Shanghai Composite experienced small losses. Economic data revealed that profits at industrial firms contracted slightly in the first two months of the year, falling short of economists' expectations. The decline underscored the challenges China faces in boosting domestic demand amid potential new U.S. trade restrictions.

Government officials reiterated their focus on increasing consumption as a key economic priority. A former vice chair of China's state economic planner suggested that domestic consumption should rise significantly over the next decade to strengthen economic resilience. Beijing reaffirmed its goal of achieving 5% annual GDP growth, an ambitious target that may require further stimulus measures.

Elsewhere, the Czech Republic's central bank decided to keep interest rates unchanged, citing persistent inflation risks. The bank's forecast suggested that inflation would remain slightly above target in 2025 before stabilizing in 2026. Policymakers noted concerns about rising service costs and global trade uncertainties, which influenced their decision to maintain the current monetary policy stance.

In Mexico, U.S. trade actions continued to escalate. Trump signed an executive order imposing a 25% tariff on auto and auto parts imports, affecting goods from Mexico and Canada that contain non-U.S. content. Given the high percentage of U.S. components in Mexican auto exports, analysts estimated that the tariff would effectively translate to a 5% tax on all Mexican exports. Mexico's President Claudia Sheinbaum has yet to announce any retaliatory measures but indicated that a response would be considered based on upcoming developments.

Markets remained volatile amid these economic and geopolitical developments. The U.S. stock market faced headwinds from trade policy uncertainty and persistent inflation. Treasury yields fluctuated as investors assessed the implications of tariffs and potential Federal Reserve actions. Meanwhile, economic data from various regions suggested mixed growth prospects, with some positive indicators offset by broader concerns about trade disputes and inflation.

Checklist for the Next Two Weeks

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