Markets shift view on tariffs as they brace for US contraction

We’ve seen a somewhat unexpected shift in the market’s view of US tariffs in the past 48 hours or so.

The enforcement of Trump’s trade levies should be propping up the dollar, but market participants this week appear to be focusing more on the impact of these restrictions on the US economy than the global one.

Indeed, markets are now bracing for a possible contraction in activity in Q1 after the closely watched Atlanta Fed GDPNow estimate, which provides a running gauge of annualised US growth, fell into negative territory late-last week - partly a consequence of the Republican DOGE efforts intended to reduce waste in the US government.

We also note that the retaliatory responses from China and Canada have been relatively restrained thus far, and merely targeted to specific sectors, rather than applied holistically.

Authorities appear keen to avoid an escalation in the tit for tat tariffs that would trigger a full blown trade war, and markets are perhaps clinging onto the hope that this keeps alive the possibility of fresh negotiations and a diluting of the tariffs at a later date. PMI and payrolls data will be closely watched in the coming days.

Investors are betting that the Fed will need to take a more aggressive approach to cuts this year, and futures are now pricing in almost three cuts during the remainder of the year.