2 May 2025: Weekly Update – Tariff Risks, Slowing Growth and Oil Weakness

The bond market indicates worries about what comes next, with expectations of interest rate cuts from the Federal Reserve suggesting tariffs will slow growth and push up prices at the same time - a challenging combination for any central bank. On the other hand, US stocks have bounced back, erasing the post-“Liberation Day” tariff losses as if it were a non-event.

The reality is that the full impact of tariffs hasn’t shown up in the hard economic numbers yet, but the warning lights are flashing in business surveys and shipping data. Reports from US ports suggest a sharp drop in US imports, and surveys of manufacturers on both sides of the Pacific are looking increasingly gloomy.

The US Federal Reserve is caught between the risk of a slowing economy and the likelihood that tariffs will push up inflation. Although markets are hoping for quick rate cuts, a data-dependent Fed may well hold fire until it’s clear that growth is truly faltering. In contrast, on this side of the Atlantic the Bank of England’s path looks more straightforward. With inflation cooling and growth losing steam, another rate cut is widely expected this week, and more could follow if global headwinds persist.

Further supporting pictures of weakening growth is the oil price, which has dropped by a fifth since the US ramped up trade tensions, coupled with indications OPEC+ might abandon efforts to support prices.

The next few months will be crucial in revealing whether the current optimism in markets is justified or just wishful thinking.