Market Monitor | April 25, 2025 Update
Headlines and Highlights
- Trade war shrouded in uncertainty: The global trade war that began in earnest this month is off to an unclear start with the U.S. and China still at odds over tariffs and even the status of any talks in question. President Trump, moving to lower the temperature of the clash, said the U.S. is actively negotiating with China and suggested a deal could soon reduce tariffs “substantially.” But Beijing insists no talks have taken place. Negotiations with other countries have produced no known deals. Treasury Secretary Scott Bessent has said the China tariffs are not sustainable, signaling Washington’s hopes to de-escalate the conflict.
- Markets rebound from sell-offs: Financial markets enjoyed by far their best week of a turbulent month as investors grew at least temporarily optimistic about prospects for trade-war progress. The S&P 500 surged more than 6% over three days and added a more modest 0.7% gain on Friday even without any announced breakthroughs in trade talks. The large-cap index is now down 6% this month, 6.1% this year, and 10.1% since reaching its all-time high on February 19th. Small caps and international stocks also had a strong week. Bond prices rose as Treasury yields declined.
- IMF slashes growth expectations due to tariffs: The International Monetary Fund issued a dour update on the global economy, saying it expects tariffs to have a significantly negative impact. The IMF cut its 2025 growth forecasts from 3.3% to 2.8% for the world economy and from 2.7% to 1.8% for the U.S. economy. It said “intensifying downside risks dominate the outlook,” citing the threats of dimming growth prospects, broader financial instability and even social unrest.
Chart of Interest
Our Views
- The trade war, particularly the high-stakes U.S. face-off with China, poses a dangerous threat to global growth. We believe the current posturing between the two largest economies will ultimately lead to a deal and the tariffs will be negotiated much lower, although it may be a difficult and lengthy process. We also think the harshest tariffs on other countries will be short-lived, mitigating the long-term economic impact. But tariffs have almost certainly inflicted short-term economic damage already.
- A U.S. recession is possible this year if businesses and consumers pull back substantially in the face of uncertainty and other tariff-related pressures. We believe any recession would likely be short and shallow, however, based on the economy’s robust health entering the period of high tariffs and our position that these trade battles will not be protracted.
- The rally in financial markets this week has been a welcome relief for investors in a difficult month. But it has been driven more by hopes and expectations than actual developments in the trade war. We expect further volatility as the uncertainty over tariffs and trade disputes continues.
- President Trump’s statement that he has no intention of firing Federal Reserve Chair Jerome Powell was important for investor confidence. Fed policy is fair game for criticism; we certainly have criticized it over the years. But it is essential to maintain the central bank’s independence from political considerations. That allows the Fed to shape monetary policy with an unbiased focus on its dual mandate: low unemployment and price stability.
- Inflation is likely to rise back above 3% by year-end due to the tariffs, but we do not expect it to accelerate longer-term as we witnessed during the pandemic. Any price increases should be temporary. Tariff-induced inflation should be a one-time jump in price growth.
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