Global growth concerns have resurfaced on financial markets, fueled by weakening U.S. economic data and rising trade tensions, which are dampening consumer confidence and business activity.
While economists do not see recession as a base-case scenario, recent data has rattled investors. U.S. President Donald Trump’s new 25% tariffs on Mexico and Canada are further escalating concerns about economic growth.
Shifting Market Sentiment
There is a noticeable shift in market sentiment. Oil prices have dropped to their lowest since October, stock markets from New York to Tokyo are retreating from recent highs, and two-year U.S. Treasury yields have fallen to their lowest levels since October, reflecting expectations of potential rate cuts.
Francois Savary, Chief Investment Officer at Genvil Wealth Management, emphasized that confidence is essential for any economy, and it has taken a hit. “I don’t think a recession is a done deal, but we have reduced our U.S. equity exposure,” he stated.
Weakening Consumer Sentiment
U.S. consumer confidence fell sharply in January, hitting its lowest point in 3.5 years, while retail sales experienced their most significant drop in nearly two years. Additionally, U.S. manufacturing activity showed substantial declines in new orders and employment.
Joost van Leender, Senior Investment Strategist at Van Lanschot Kempen Investment Management in Amsterdam, believes a recession is unlikely but acknowledges a potential growth slowdown. He attributes uncertainty to the “chaotic” U.S. policy environment.
Trade Tensions Amplify Growth Risks
The Atlanta Fed’s GDPNow model has slashed its growth estimate for the U.S. economy, dropping it from +2.3% to -2.8% for this quarter. This shift underscores the increasing concern about the economic impact of trade wars and tariffs.
China has retaliated against the U.S. by imposing tariffs of 10-15% on certain U.S. goods, effective March 10. Additionally, trade-sensitive auto stocks fell by 4% on news of the new U.S. tariffs on Mexico and Canada, where many U.S.-bound cars are produced.
Morgan Stanley warns that these tariffs could cut U.S. economic growth by 0.7-1.1 percentage points and push Canada into a recession, with Canadian growth potentially dropping by 2.2-2.8 percentage points.
Impact on Currency and Rates
The Canadian dollar and Mexican peso hit one-month lows due to trade uncertainty, while the U.S. dollar weakened as concerns over U.S. economic performance intensified. Some analysts suggest the U.S. economy could face a troubling mix of sluggish growth and persistent inflation, further exacerbated by the ongoing trade war.
As the global economy faces mounting pressures, central banks are likely to maintain a rate-cutting stance to support growth. Traders are now pricing in 75 basis points of U.S. rate cuts by the end of the year, a stark contrast to the single cut expected just a few weeks ago.
The European Central Bank is also expected to cut rates again, with analysts predicting another rate reduction in April due to weakening economic data and inflation concerns.
Market Caution Amid Uncertainty
Even with a potential rebound in U.S. economic data, analysts recommend caution when it comes to equities. Hedge funds that had previously been bullish on global stocks are now betting on declines, according to Goldman Sachs.
Consumer discretionary stocks, often seen as a gauge of consumer spending power, were the worst-performing U.S. sector last month, reflecting growing concerns over the health of the broader economy.
The upcoming U.S. jobs report is expected to provide critical insights into the state of the labor market and its impact on the economy. Samy Chaar, Chief Economist at Lombard Odier, emphasized that the economic cycle, which is consumption-driven, will only face significant challenges if the labor market weakens.
As markets navigate these turbulent conditions, maintaining a cautious approach remains key to managing potential risks.
