April has arrived, but spring is not in the air for ‘free-loading’ Europe, says Mark Dowding, CIO at RBC Bluebay Asset Management.
In the run-up to April 2, the day Trump has declared ‘Liberation Day’ for America, markets are still gripped by the threat of tariffs and their potential impact on the global economy. “If ‘Liberation Day’ is going to be about reciprocal tariffs, then this week’s decision to impose a blanket 25% tariff on all imported cars has taken away some of the complacency that the US government will moderate its tone.”
The decision unsettled financial markets just as they were recovering somewhat from earlier losses. However, US Treasuries did not benefit from a deterioration in risk appetite or a flight to quality. Instead, market yields rose. Investors are worried that a looming trade war could lead to stagflation, with prices rising even as domestic consumption and growth come under pressure, says Dowding.
A Cooling Economy?
For now, economic data continues to show relatively robust underlying economic activity. However, forward-looking indicators still point to potential weakness ahead, he warns. For example, consumer confidence fell to a 12-year low this week amid concerns about tariffs and Department of Government Efficiency (DOGE) spending cuts.
This indicator is also strongly influenced by the political preferences of Americans. “For example, many Democrats are currently extremely pessimistic about the Trump administration’s policy agenda, while Trump supporters generally have a more constructive view.”
Looking at credit card data, falling delinquency rates indeed suggest that consumers are doing relatively well, wages are rising and unemployment remains low, according to Dowding.
Regarding fiscal policy, the DOGE cuts could hurt in the coming months. “We think that cuts will ultimately be used to finance tax cuts. On balance, the contribution to growth this year and next is likely to be negligible.”
Short in Treasuries
The CIO expects economic growth in the US to cool to around 1.5% in the coming quarters, which is below the long-term average. “However, with inflation expected to rise, we doubt the Fed will ease policy in the near term. This could keep Treasury yields trading in a range. After shorting 10-year Treasuries around 4.2%, we are currently targeting 4.5%, believing this will bring us close to fair value.”
