Markets cheer US policy stabilisation

Posted 2 May 2025

It ends as a pretty good week for global markets. That is despite dire US GDP figures, mixed earnings reports from the biggest US tech companies and, for us, disappointing news that a US-UK trade deal is unlikely to come soon. Investors feel positive because they think the White House chaos has abated, and Trump might now support growth rather than hinder it.

This partly feels like ‘no news is good news’, but there are some signs of a more stable atmosphere. It just is not clear whether it will stay that way, and how much economic damage, e.g through supply chain disruption has already been done.

The president’s present from Scott Bessent.

It looked like April was going to end with a selloff, following news that the US economy contracted an annualised 0.3% in the first quarter of 2025. US markets sold off 2% after Wednesday’s opening, but recovered by the day’s end – spurred by surprisingly strong earnings reports from Meta and Microsoft.

Apple and Amazon followed on Thursday with less encouraging news, both hit by tariff preparations. Nevertheless, encouragingly, the four US tech giants announced plans to maintain or increase capital expenditures. Some of that is in response to tariffs, but most of the spending continues to revolve around AI – showing there is life in the investment boom yet. Encouragingly, despite the midweek seesaw action, implied market volatility has fallen considerably over the last few weeks.

In one sense, it was nice to see economic and company data driving markets again, instead of Donald Trump’s social media posts. But, the US administration did have a calming influence on markets. Investors liked the more conciliatory noises from the White House – and they especially liked that treasury secretary Scott Bessent was the one making them. Bessent is investors’ favourite cabinet member, and he has been significantly more prominent across all policy areas since the US treasury bond selloff last month.

His presence has significantly eased markets’ fears. Trump has now passed 100 days in office, and for much of that time, White House policy has been a fight between the economically disinterested social conservatives and the traditional small-state Republicans. Markets hope Bessent leads the latter faction to victory. Considering Trump has the lowest net approval recorded for any US president at 100 days (including his own first term), he would do well to make that happen.

US Q1 GDP numbers are misleading, so watch employment.

This may sound counterintuitive, but America’s GDP contracted in the first three months of the year because consumers and businesses bought more imports ahead of tariffs. Imports are subtracted from domestic sales in GDP calculations because they are not produced domestically (the D in GDP), so disproportionately high imports can decrease GDP even though people are buying more. The even stranger part is that when imports decline later on – after tariffs hit and the rush ends – GDP growth could therefore be higher in the following quarters, even though it comes from a position of weak demand. Tariffs are distorting GDP figures and will probably continue to do so until at least the second half of 2025.

For a truer picture of the US economy, employment is the stat to watch. One worrying US labour market report, The Challenger Report, suggested more US workers are being laid off. It has been skewed by DOGE’s recent cuts to federal employees, so this is likely a one-off spike.

Today’s US payroll data for April was surprisingly strong yet again, with the overall non-farm jobs total rising 177,000 and private sector jobs rising 167,000. Other data sources show a much weaker picture, that companies are neither hiring nor firing (the ADP private employment change was only 62,000). Most companies are holding on to exiting staff, given labour supply has been declining since Trump all but shut the borders to immigration. That does not necessarily mean unemployment will rise, but even so it suggests a slowing environment for services’ business investment.

The Federal Reserve will probably be more focussed on soft employment data than the potential inflationary impact of Trump tariffs. The Fed is highly unlikely to cut interest rates at its meeting next week, but might give some clues about its outlook. Tariffs are clearly seen as more of a growth negative than an inflation shock – shown by the fact that markets now project significantly more rate cuts than they did at the start of April. The first of these is expected in July, after Trump’s 90 day tariff suspension is set to end.

Markets search for signs of stability.

Interestingly, markets’ longer-term expectations suggest US interest rates will rise again 18-24 months from now, which would require stronger future growth. At the moment, this seems more like a feeling than a firm prediction. But given Trump has backed down to market pressures – and that timeframe coincides with US midterm elections – it is a reasonable expectation. That is a key part of investors’ serenity about medium-term global growth.

There are a few signs of policy stability to back up that feeling. The White House is reportedly close to a trade deal with India (though India-Pakistan tensions could be a roadblock) and has at last signed a mineral rights deal with Ukraine. Closer to home, Germany’s coalition deal has also shown a willingness of politicians in Europe’s largest economy to compromise, so that fiscal expansion might be effective and timely. None of these are substantial market movers, but in tandem they help investors feel more secure about where the global economy is heading.

A calmer Trump administration is a key ingredient to this – and the president’s declining popularity makes it more likely, though obviously not certain, that will continue. Another key ingredient is expected dovishness (preferring lower interest rates) from central banks. The Fed is not expected to cut at next week’s meeting, but the Bank of England is – and both are expected to cut several times before the end of the year. That helps smaller businesses in particular, which is why small cap stocks have rallied across most regions recently.

Most investors still think that the real Trump is growth-friendly and that the fundamental economic outlook is strong. It has taken only a couple of weeks for a quieter Trump to make investors feel better. We hope this week’s stability continues, even when the damage that has been done to US supply chains shows up more decisively in the data – but we will not count on it.