Macro
This week marked a pivotal moment for global markets. President Trump’s “Liberation Day” tariffs sent shockwaves through the economy, while the latest jobs data revealed both strength and underlying fragility. With inflation concerns mounting and recession risks rising, markets now face a high-stakes reset. Here’s what you need to know.
U.S. employers added 228,000 jobs last month, beating all forecasts despite downward revisions to previous months. The jobless rate increased to 4.2% due to a rise in labor force participation, while wage growth remained solid, signaling labor market strength ahead of potential disruptions from global tariffs. A household survey covering unemployment and labor force participation showed employment rebounding after a sharp drop in February. The unemployment rate rose for mixed reasons—more people entered the labor force, which is positive for hiring, but there was also an increase in permanent job losses.
While March’s headline job growth was robust, underlying dynamics suggest the labor market may be more fragile than it appears. Hiring gains were concentrated in sectors like healthcare, transportation, and retail, some of which benefited from temporary factors such as the return of striking workers. At the same time, government employment showed signs of softening, particularly at the federal level, hinting at deeper structural pressures. The rise in the unemployment rate, driven largely by an influx of new labor market participants, masks growing concern about the durability of demand. With the prime-age employment-to-population ratio stagnating and job openings no longer providing the cushion they once did, any further slowdown, especially from the disruptive effects of recent tariff escalations, could tip the labor market toward a more pronounced deterioration. Market participants are increasingly focused on whether the Fed will respond with rate cuts, but persistent inflation expectations may limit its flexibility until clearer signs of labor market distress emerge.
These labor market concerns are unfolding just as the U.S. shifts toward a more aggressive trade stance. Trump’s “Liberation Day” tariffs mark a strategic pivot—aimed at restructuring global trade, not just short-term leverage, raising fresh risks for an already fragile economy.
At the start of the year, the weighted average tariff in the US was 2.7%, but with all tariff plans announced so far, we can get to 10.9%, so there is an 8.2% increase. Those numbers are not very precise, and they move a lot even week to week, but they are extremely large, just over 3x the weighted average US tariffs before Trump. Also, tariffs on average bring total inflation up by about 10%; in other words, for every 100 bps of weighted average tariffs, the core inflation goes up by 10 bps.
Over the past few weeks, markets had been brushing off concerns about proposed tariffs. However, President Donald Trump’s “Liberation Day” announcement made it clear that tariffs are not just a short-term political tactic but part of a broader strategy to reorder global trade. The administration unveiled a sweeping tariff plan, including a baseline 10% levy on nearly all imports, with significantly higher rates targeting specific countries. The goal is to reduce U.S. dependence on foreign goods and address longstanding trade imbalances.
More than just trade tools, tariffs are being positioned as a means to regain economic leverage. Currency policy is also expected to play a key role in managing the global adjustment. The broader ambition is to reallocate economic burdens and benefits more fairly, bringing back production, jobs, and industrial strength to American workers and producers.
This approach reflects ideas advanced by Stephen Miran, a Harvard-trained economist and senior strategist at Hudson Bay Capital Management, who has emerged as a key intellectual architect behind the push for strategic tariffs. Miran has argued that tariffs should not be treated as ad hoc penalties but as part of a structured economic doctrine. Miran proposes creating a tiered tariff system, where countries are grouped based on how fairly they trade and contribute to U.S. security objectives. Those aligned with U.S. interests would enjoy lower tariffs; others could face higher rates. This framework views access to the U.S. consumer market as a privilege, not a right, and links economic cooperation with defense burden-sharing. It echoes the idea that trade and national security are inseparable, and tariffs can be used to realign both.
Miran views the overvalued U.S. dollar, caused by global demand for dollar assets, as a structural burden on American manufacturing. He proposes a shift in currency policy to rebalance trade and recapture economic benefits currently flowing to foreign holders of U.S. debt. Miran notes that while reserve currency status gives the U.S. geopolitical power, it also creates persistent trade deficits, weakens industrial competitiveness, and ultimately strains the domestic economy.
The Trump administration’s tariff rollout appears to channel the strategic intent of Miran’s framework, seeking to rebalance global economic relationships in favor of American workers and producers. However, its execution departs sharply from economic soundness. Rather than applying a structured, tiered system based on trade fairness or security alignment, the administration employs a simplistic formula rooted in bilateral trade deficits. The resulting tariffs are often economically inconsistent and disconnected from actual trade behavior, suggesting that beyond stated policy goals, the strategy may be designed as a tool for negotiation and leverage.
At the center of this approach is a formula that calculates a country’s tariff by dividing the U.S. trade deficit with that country by total imports from it, then halving the result—subject to a 10% minimum. While the formula is easy to communicate, it overlooks the complexity of modern trade, including capital flows, global value chains, and structural currency misalignments. It also imposes tariffs on countries with which the U.S. runs trade surpluses, reinforcing the view that the policy is less about economic precision and more about exerting bilateral pressure.
Economists have further criticized the formula’s reliance on flawed assumptions about price elasticity – the responsiveness of trade flows to price changes. By significantly underestimating elasticity, the model inflates the implied foreign tariff rates, which in turn justify disproportionately high U.S. tariffs. Correcting this would bring most tariffs back to the 10% baseline, with few exceeding 14%. Combined with broad and loosely defined justifications, including VAT regimes and vague accusations of unfair practices, the framework grants the administration wide discretion to penalize countries regardless of their actual trade behavior or alignment with U.S. interests.
Jerome Powell has taken a rare and sharply critical stance against President Trump’s new tariffs, warning that they will raise inflation and slow economic growth. He emphasized that the scale and severity of the tariffs could lead to more significant and longer-lasting damage than previously assumed. Contrary to the administration’s claims that the tariffs are a necessary remedy for a weak economy, Powell pointed out that recent data, particularly on jobs and employment, suggest the economy was healthy and growing before the tariffs were introduced.
He also expressed concern about the uncertainty created by the trade measures, noting that outside forecasts are beginning to raise recession risks, even from a low base. Powell clarified that any “sickness” in the economy appears to be newly introduced, likely referencing the market and economic disruption from the tariffs.
While Trump publicly pushed Powell to deliver an emergency rate cut to counter the market fallout from the tariffs, Powell did not signal any intent to do so outside the Fed’s scheduled process. His response reinforces the Fed’s independence and cautions against politically motivated monetary decisions, particularly when inflation remains elevated.
In general, my expectations around the tariff policy and its impact on global markets are more optimistic than the prevailing consensus. While the initial reaction has been marked by volatility and uncertainty, it’s essential to recognize that President Trump is ultimately deal-oriented. The short-term disruption, which sent shockwaves through the market, reflects US confidence to compel trading partners to negotiate. International response to the U.S. tariffs involves a combination of negotiations, legal challenges, and potential retaliatory actions.
That said, this is a high-risk tactic. While it may yield some benefits for American industry, it is highly unlikely to fully succeed. Companies don’t simply relocate capital expenditure and production lines overnight. These multi-year commitments extend far beyond the political cycle and Trump’s term in office. And with most of the announced measures unlikely to be fully implemented before the end of Trump’s term, the long-term impact remains uncertain. This is arguably the most ambitious economic experiment since the global financial crisis – an all-in bet on reshaping the global order, with the U.S. pushing its chips to the center of the table.
Rates
Money markets are now pricing in a full percentage point of rate cuts by year-end, up from 75 basis points prior to the announcement of new tariffs. Meanwhile, 10-year Treasury yields have dropped below 4%, touching 3.95% which is their lowest level since before the election. U.S. equities extended their losses, with the total market value decline now reaching $2.5 trillion. The move has been felt across the yield curve over the past two sessions, but this year it’s the short end that’s repricing most aggressively. The 2-year yield now stands at 3.62%, more than 100 basis points below its level just a few months ago. Ten-year breakeven inflation rates are at 2.18%.
This rate repricing reflects growing macroeconomic concerns—especially around growth—but markets appear to be underestimating the inflationary impact of the tariffs. The focus is heavily skewed toward slowing activity, while inflation risks are not yet fully priced. For investors concerned about this disconnect, buying breakevens at 2.18% via TIPS or inflation swaps could be a compelling trade.
The Federal Reserve is now squarely focused on pricing data and labor market dynamics, including employment, participation, wages, age cohort behavior, job creation, openings, and quits. Chair Powell reiterated that tariffs would likely lead to at least a temporary uptick in inflation, but this time he acknowledged the possibility of a small, persistent component. Still, he emphasized that long-term inflation expectations remain anchored. He also flagged deteriorating consumer and business sentiment, but confirmed that this does not yet warrant a change in the Fed’s plan to gradually cut rates. For now, the Fed remains on course, offering no sign of a “Fed put” that risk asset investors might be hoping for.
Currently, markets are pricing in roughly a 50% chance of a 25-basis-point cut at the Fed’s May meeting. Some investors are even positioning for an emergency cut before then, as indicated by a surge in activity in April Fed funds futures.
In this environment, investors are increasingly turning to curve steepener trades—buying short-term (2-year) notes and selling long-term (30-year) bonds. This reflects expectations that the Fed will ease policy in response to economic weakness, while persistent inflation pressures keep longer-term yields elevated.
However, the Fed is under growing pressure as long-term inflation expectations rise to levels not seen in decades. At the same time, Powell has acknowledged that the latest round of tariffs will likely contribute to that pressure. This makes it unlikely that the central bank will cut rates aggressively unless there is clear and sustained deterioration in the labor market.
As markets digest the impact of President Trump’s broad tariff package—and potential foreign retaliation—attention is turning to key foreign holders of U.S. debt. China and Japan, both major targets of the trade measures and the largest foreign creditors to the U.S., are under scrutiny. Notably, both countries have already been gradually reducing their Treasury holdings in recent years, a trend that could accelerate depending on how trade tensions evolve.
Credit
The credit market had been largely dormant in recent months, with spreads hovering near all-time lows. Credit investors felt shielded from the growth concerns weighing on other risk assets, thanks to the attractive yields offered in the high-yield environment. That complacency was shattered by the recent tariff announcement, which sent shockwaves through global credit markets and sharply increased the perceived probability of a U.S. and global recession. Spreads widened across the board, but the most pronounced impact was seen in lower-rated bonds, given their heightened sensitivity to economic downturns and higher expected losses in a weaker macro environment. Junk bond spreads surged globally, with the U.S. market seeing the most acute repricing.
High-yield spreads widened by 45 basis points during Thursday’s sell-off, reaching 386 basis points—the largest single-day move since 2020. Over the past six weeks, total yields in the high-yield space have climbed from 7.2% to nearly 8%. Credit markets are now grappling with what may be the most significant shift in the macro landscape in decades, as the world’s largest economy moves away from globalization and toward economic isolation. In such an environment of heightened uncertainty, it’s difficult to judge whether current spreads fully reflect the risks ahead. High-yield bonds have offered an attractive alternative to equities in recent months, but with the latest equity market sell-off, the balance between risk and reward is beginning to shift. The U.S. credit market, once prized for its stability and transparency, may now face headwinds as those qualities come into question, potentially undermining its status as a haven for borrowers and investors alike.
In another sign of growing stress across credit markets, CDS contracts also surged in price this week. As investors rushed to hedge against rising default risk, these instruments (known for their high liquidity) became a go-to tool for quickly reducing exposure during volatile trading sessions. The North American Investment Grade (IG) 5-year CDS index rose 8.5 basis points to 75.7 bps.
This index had been trading in a range of 47 to 54 bps over the past year and was as low as 46.5 bps as recently as February. For context, during the recession fears driven by rising interest rates in 2022, it traded above 100 bps, and it spiked to 150 bps during the early stages of the COVID-19 market sell-off.
Credit spreads began widening in early March, as data started to reflect signs of weakening in the credit environment—most notably through declining CapEx and M&A activity. The tariff announcement then accelerated the move, triggering a sharp repricing. High-yield spreads have now approached 400 basis points, following a dramatic 60 bps widening on Thursday alone -the largest single-day move since the onset of COVID. While markets may still be underpricing the risk of a recession, corporate balance sheets remain relatively strong. Investment-grade credit is currently of the highest average quality in over a decade, with interest coverage ratios in the 70th percentile of historical levels.
In this uncertain environment, credit markets benefit from built-in buffers. Companies have become more conservative, holding larger cash reserves, maintaining healthier balance sheets, and scaling back new debt issuance. These defensive behaviors help mitigate credit risk and have contributed to the ongoing improvement in credit quality – a direct corporate response to rising macro uncertainty.
European credit is likely to fare better than U.S. credit in the near term. Not only is it starting from a lower price base (providing more downside cushion), but historical patterns also suggest that the countries imposing tariffs typically suffer more economic damage than their trading partners. Additionally, the European Central Bank is better positioned than the Fed to respond with rate cuts if needed.
The investment approach in credit remains consistent with the view from the start of the year: move up in quality, up in liquidity, and up in the capital structure, while leaning more toward Europe. In light of the new tariff regime and growing global uncertainty, these principles have become even more essential.
Equities
President Trump’s new tariffs have unleashed a wave of market turmoil reminiscent of the early pandemic days. The S&P 500 shed $5.4 trillion in market value over just two sessions, falling 9.1% on the week—including a 6% drop on Friday, the sharpest single-day decline since March 2020. The Nasdaq 100 officially entered bear market territory, down 21% from its peak, while the Magnificent Seven stocks posted their worst weekly performance since March 2020, falling 10.1%.
The S&P 500 had stalled just above the key 5,400 level on Thursday before gapping down at Friday’s open. By 9:42 a.m. in New York, the index had already dropped to 5,200. For much of the morning, it hovered around the August low before eventually breaking below 5,123. The session closed with a final push lower, accompanied by $5 billion in volume, finishing the day at 5,074.
Several developments over the weekend could influence Monday’s market open, but for now, 5,123—the August low—is likely to act as a new resistance level. The bigger question is how far the S&P 500 might fall before stabilizing. BCA’s Chief Strategist, Peter Berezin—who had held a bearish outlook since the end of last year—now appears vindicated, though largely due to the tariff shock rather than recession fears. His year-end target for the S&P 500 is 4,450. To reach that level, the index would need to fall to a forward P/E of 18, accompanied by a 10% cut in earnings estimates. For context, earnings estimates are typically reduced by about 20% in a standard recession.
So far, the downward revisions are modest but growing. According to FactSet, the bottom-up earnings-per-share (EPS) estimate for S&P 500 companies declined by 4.2% in Q1, dropping from $62.89 to $60.23. This decline exceeds the average reductions observed over the past five, 10, and 15 years, and aligns with the 20-year average. Moreover, a majority of companies issuing first-quarter guidance have provided negative projections—signaling weakening growth and fading corporate confidence.
Treasury Secretary Scott Bessent quipped that this sell-off is a “Mag-7 problem, not a MAGA problem.” Indeed, the Magnificent Seven stocks have been under pressure for most of the year, posting double-digit losses even before the tariff announcements. Up until “Liberation Day,” the S&P 500’s correction was largely driven by the Mag-7 names, while the remaining 493 stocks held relatively steady. But that dynamic shifted sharply following the tariffs. Smaller companies have taken the brunt of the sell-off, with the S&P Small Cap 600 falling over 7%. Real-economy names—such as homebuilders and regional banks—were hit especially hard, falling 6% and 10%, respectively.
While many technical indicators are flashing oversold, the speed and scale of the recent moves—especially against a backdrop of strong macro signals—make traditional setups less reliable. The VIX has surged to 45, its highest level since the early days of the COVID-19 crisis, a reading typically associated with market capitulation. Yet so far, there has been no clear macro confirmation of such a capitulation event.
Markets are now watching for a catalyst: either Trump softening his tariff stance or Jerome Powell accelerating rate cuts. At present, however, both appear committed to their respective positions.
Adding to the uncertainty, the VIX-to-VVIX ratio has climbed to levels last seen during the 2022 rate-hike-driven sell-off—a period when volatility continued rising for weeks before markets eventually bottomed in October. The CBOE 1-month Implied Correlation Index currently sits at 45, suggesting further room for dispersion. Meanwhile, 3-month implied correlations remain well below historical highs, indicating that volatility could still spread across sectors in the weeks ahead.
The cost of financing equities has fallen sharply in recent weeks. While credit spreads and the U.S. dollar have declined, the Financial Conditions Index (which typically moves with credit) has actually tightened, indicating improved liquidity and easier financial conditions overall.
Goldman Sachs has increased its probability of a U.S. recession to 35%. If a recession were to occur, they estimate a typical drawdown of 25% from recent highs, translating to a 17% decline from current levels to a projected trough of 4,600 on the S&P 500. This would imply a forward P/E ratio of 17x. For context, during the 2022 sell-off the multiple hit 15x; in the COVID downturn it reached 13x; and in 2018, 14x. Goldman also revised its 2025 earnings growth forecast from 9% down to 3%.
This sell-off has brought the highest level of equity dispersion in decades. The Magnificent Seven stocks are down 15% year-to-date, with all except Apple in a 20% drawdown and Nvidia over 37% is now trading at its lowest forward P/E since 2019, at 22.7x. At their peak in January 2025, the group represented 34.7% of the S&P 500, but that share has now fallen to just over 30%. At the start of the year, they traded at a lofty 33x forward earnings, but have since compressed to 25x. The decline reflects falling earnings expectations, investor concerns around aggressive AI CapEx, and broader macro pressures on risk assets.
The remaining 493 stocks in the S&P 500 are collectively down just 1%, with valuations drifting modestly to a P/E of 19x. Sectors like energy, healthcare, utilities, and insurance have helped support this group, while fund managers this quarter have clearly been reallocating away from technology, industrials, and consumer discretionary into more defensive sectors. Over the last decade U.S. companies continue to reinvest heavily, allocating around 40% of their cash flows back into their businesses, compared to a global average of just 25% outside the U.S. The worry is that tariffs will impact sentiment causing US companies to temporarily pull back their spending which can affect growth.
Despite the correction, a capitulatory bottom is not yet evident. However, the recent lows are encouraging some portfolio reshuffling, as investors weigh mounting risks including tariffs, recession fears, and the burden of ongoing AI-driven capital expenditures.