Back to the chaos

After an extended  Easter break in the UK, we are back to the same uncertainty we have had for the past few weeks. On Monday, after Mr Trump called for the Chairman of the Fed’s head as he dared defy his leader, by not bowing to answer his call to cut US interest rates immediately if not sooner, bearing in mind any movements in interest rates are not only Mr Powell’s decision, but that of the entire committee. These threats to the independence of the Fed are unlikely to be welcomed, and as a result, the dollar, the treasury market and the major stock indexes all fell. What is noteworthy is that during periods of uncertainty, historically, the dollar and treasuries find support, but not under this regime. All get thumped, or should I say Trumped.

One voice of reason is Scott Bessent, the treasury secretary. He is a widely respected financier who, at times, brings a calming presence during periods of heightened volatility. And so he did yesterday by indicating that he expects the U.S. and China to begin de-escalating their trade hostilities in the “very near future.” Not suggesting for a moment that he would resign his post, but were he to do so, it would throw markets into greater turmoil. His soothing comments may have helped U.S. stocks recover some of the previous day’s losses, but they did little to restore the U.S. dollar, which continues to weaken. The pound is nearer to 1.34 to the dollar. Mr. Trump also appeared to row back on his threats toward Mr. Powell, claiming it was all a big misunderstanding; the media got it all wrong. Once again, I suspect we saw Mr. Bessent’s hand at work, this time behind the scenes.

Yesterday, in its biannual statement of the obvious, the IMF announced that tariffs have unleashed a “major negative shock” into the world economy. As a result, the International Monetary Fund has cut its forecasts for US, UK, and global growth. The IMF now expects the global economy to grow at 2.8% this year instead of the 3.3% it had pencilled in at the start of the year. As they reduced their forecasts for the UK economy, they stated that although tariffs and the uncertainty created would weigh on the economy, “domestic factors” were mainly to blame for the downgraded growth forecast. They in particular referred to increased government borrowing costs and weaker consumer spending in response to higher UK inflation, partly driven by rising energy bills.

Has all this volatility led to a greater chance that interest rates will be cut further in the US and the UK in the coming months? The likelihood is yes. Today, we get the monthly global flash purchasing manager surveys; we should start to see the impact the trade war threats could have on economic activity in the coming months.