Market Monitor | January Update
Headlines and Highlights
- Trump levies stiff tariffs: President Donald Trump imposed steep tariffs on goods from Mexico, China and Canada, then agreed to 30-day holds with both Mexico and Canada in signs the high amounts are subject to negotiations. Trump also repeated his warning that the European Union and potentially the United Kingdom will also face tariffs, while acknowledging that Americans could bear some of the economic burden of a budding global trade war. The actions stirred volatility in global markets and were condemned by U. allies.
- Fed hits pause on rate cuts: The Federal Reserve halted interest-rate cuts following reductions at its prior three meetings, going into wait-and-see mode with inflation’s downward progress stalled and tariffs’ impact on inflation uncertain. The decision leaves the federal funds rate at a range of 4.25%-4.5% – above the pre-pandemic level but down a full percentage point from last year’s peak. A subsequent reading of the core PCE (Personal Consumption Expenditures) index showed inflation excluding food and energy remained stuck at an annualized level of 2.8% in December.
- Markets open year on positive note: Financial markets moved higher to open 2025 despite the uncertainties posed by tariffs and a hold on further rate cuts. Strong corporate earnings buoyed the S&P 500 despite a down month for the tech sector, which fell 4.2% amid pressure from a new AI competitor in Chinese startup DeepSeek. All 10 other sectors rose. The tech sell-off sent many investors into bonds, which rebounded from the previous month’s drop.
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Our Views
- The new tariffs will have increasingly negative consequences on the economy the longer they are kept in place. We believe the president will negotiate to reduce the tariffs and avoid a long-term trade war, however, given their potential impact on the economy and markets. Some prices will escalate but we do not expect to see a material increase in inflation in the near term.
- U.S. economic data show scant sign of weakening despite the prolonged period of above-normal inflation and elevated interest rates. Real GDP growth is projected by the Atlanta Fed to expand by 3.9% year-over-year in the first quarter after rising 2.3% in the fourth quarter and 2.9% for all of 2024. Assuming that harsh tariffs are not in place for long, the economy should benefit from the administration’s growth focus and the lagging positive effects of rate cuts.
- Markets are likely to experience more volatility as investors react to Trump administration policies. Robust corporate earnings and a market-focused president should ultimately provide a tailwind for the stock market, however.
- The Federal Reserve will be cautious in resuming interest-rate cuts until it determines the impact of tariffs on the economy. We still expect the Fed to lower rates sooner than the market expects and to make two to three quarter-point cuts in 2025.
- The dollar may increase against foreign currencies in the short term because of the tariffs, but we do not anticipate a sustained rise or a repeat of the 8% surge in 2024. International stocks, whose performance was hurt by that fourth-quarter runup, were a top-performing asset class in January when foreign currencies gained against the dollar.
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