Key Highlights

• Tariffs continue to dominate risk, but new quarter vulnerable to upside move on positive surprises.
• Economic news will compete with tariffs for investor attention as global PMIs, RBA rate decision, U.S. jobs report all due out this week.
• Politics will remain important, with elections in Canada, Australia, South Korea key for April.

What you need to know

This week brings a partial solar eclipse, the Eid-al-Fitr holiday, April Fools’ Day, President Trump’s “liberation day,” when tariffs are announced, and the U.S. Services ISM and labor reports. Concerns about the impact of tariffs on global growth are counterbalanced by fears of inflation. Political risks are also important for investors, with the outcome of the election in Canada important for addressing tariffs, the Australian vote key to the budget and the RBA’s rate decision, and the South Korean Supreme Court’s ruling likely to lead to a new election. The combination of tariffs, politics and higher inflation has resulted in fears of stagflation, as seen in global equities. The end of the first quarter on Monday will provide a historic trading tape, as fast reversals and higher volatility resulted in a great trade rotation away from U.S. big tech to EU defense and Chinese AI stocks. However, we are neutral on risk as U.S. equity holdings are still 2% below their long-term average and iFlow shows cash holdings are above normal, spiking on the week to highs for the year and setting up the week ahead for further fast moves if clarification about tariffs leads investors to buy the dip or chase value trades. The highlight of the week will be the release of the U.S. jobs data on Friday, and the U.S. Services ISM scheduled for Thursday, which will be compared against global PMI reports to confirm the divergent growth narrative that drove trading in March. The question is, will we see green shoots or April showers for risk positions?

_{EXHIBIT #1: U.S. EQUITY FLOWS SUGGEST SLOWER GROWTH, NOT A RECESSION}

Our take: Month-end trading for the week kept volumes higher, but uncertainty continued. Trump surprised with a 25% auto tariff plan but also suggested reciprocal tariffs would be lenient with some as modest at 2.5%. The fallout from tariffs for equities this week hurt Europe (EuroStoxx 600 off 1.7%) and Asia (Nikkei off 1.5%, HIS off 1.1%) and left U.S. shares outperforming for the second week. We saw notable reversals for automakers and semiconductors globally, with rising fears about retaliatory tariffs from the EU and others driving down the Magnificent Seven shares. Some of the price action was driven by rebalancing, some of it was rethinking U.S. recession risks and some came from auto tariffs. U.S. reindustrialization, a key goal of President Trump, shows up in U.S. equities flows, but comes at the expense of the rest of the world and, more dramatically, in consumer and business surveys, which fell to recession levels.

Forward look: The ability of markets to ignore soft data on surveys that point to recession risks requires evidence in the hard data. This will make the volatility around the U.S. ISM and jobs reports important. Furthermore, the significance of the rest of the world in driving U.S. markets has increased – as bond yields in Germany or Japan matter to the U.S. again. This makes global PMI reports, particularly in Asia, event risks. BoJ rate normalization could be delayed if there are downside surprises, and JPY could become an important barometer for risk moods again.

_{EXHIBIT #2: U.S. GDP AND CONSUMER CONFIDENCE}

^{Source: University of Michigan, FRED, BNY}

Our take: The mood of U.S. consumers has not matched their actions. This means there is more event risk in economic releases ahead. The March final U.S. University of Michigan consumer sentiment survey dropped 28.2% y/y to 57 – a level not seen since the pandemic or 2008. Job security has eroded, and two-thirds of survey participants see unemployment rising. This is the key trigger for FOMC rate cut action – making the Friday report essential for shifting bond yields in the U.S. despite fiscal worries and the rest of the world shifting to higher growth and higher debt needs. The history of moods driving economic growth isn’t perfect but merits caution.

Forward look: We expect any rally back in risk in the next few weeks to be linked to good news – either because tariffs are less dramatic than anticipated or are delayed because of negotiations. Economic data is going to become increasingly important for investor clarity, with a keen focus on growth. As we have seen, the washout in risk in the first quarter makes for a short-term bounce back risk. The Q1 earnings outlooks are significantly lower and while they start in two weeks, warnings have been average, with the industrials and transportation industries now the focus and financials likely benefiting from higher volumes and volatility. The bigger worry about the tech sector and U.S. rotations will likely have to wait until earnings play out.

What we’re watching

North America: Tariffs and jobs

April 2, the day reciprocal tariffs are set to be announced by the administration, looms. There is still uncertainty about which countries will be targeted as well as the scope and breadth of the new tariffs. While media reports have hinted that the new tariffs could be less severe than feared, we won’t know until they are announced. Currencies have been responding less reactively to the constant stream of tariff headlines of late than they did in January and February but yields and equities continue to show elevated responses.

The week ahead also brings key U.S. labor data, starting with the JOLTS report on Tuesday and culminating with the February nonfarm payroll (NFP) print on Friday, April 4. The pace of hiring is expected to slow, from 151k new jobs created in January to 135k in February. Weekly initial claims do not yet reflect government jobs lost because of DOGE layoffs, with the four-week moving average of this series at 224k, a recent low. Claims have picked up in Washington, DC and Virginia, although Maryland has not seen much of an increase. Nevertheless, we will be watching nonfarm payroll numbers closely to compare federal job losses against private-sector jobs created.

_{EXHIBIT #3: U.S. WEEKLY INITIAL JOBLESS CLAIMS STILL DON'T REFLECT THE IMPACT OF DOGE JOB CUTS}

^{Source: BLS, Bloomberg, BNY}

Europe’s response to tariffs in focus

As domestic politics and monetary policy move into the background after a potentially era-defining quarter, the European Commission and national governments in Europe must now go on the front-foot on the external front. The U.S. is the second-largest market for EU vehicle exports, meaning the balance of payments and employment implications for Europe arising from U.S. tariffs are profound. After a surprisingly strong quarter for European assets, markets will be exceptionally sensitive to news that could jeopardize the positive reflation and growth narrative.

The arrival of tariffs will also reignite debate within the ECB. Dollar strength and global supply pressures tend to push up inflation for exporters, adding further stagflation pressure to developed economies. On the other hand, there is a view that the demand shock from a drop in exports will have the opposite effect on inflation. Last week, ECB Governing Council Member Centeno said that “a widening global tariffs war is unlikely to speed up inflation in Europe and could end up having a negative impact on prices.”

Where we expect more unanimity is the political response. Reports on Friday suggest that the EU is now drawing up a “term sheet” for potential agreement, according to which concessions on duties, taxation and regulations are possible. This is probably the best-case scenario and will buy Europe time and space on the external front while it concentrates on domestic growth and productivity challenges. Post-rebalancing, the EUR should be able to hold on to much of its recent gains. However, if talks break down, Europe could revert to confrontation. For example, France has pushed for activation of the EU’s anti-coercion instrument, which contains options, including limiting access to EU financial markets by U.S. firms. Such downside risks are vastly underpriced in FX markets (Exhibit #4).

_{EXHIBIT #4: IMPLIED VOLATILITY IN EUR/USD OPTIONS REMAIN NEAR YTD LOWS}

^{Source: Bloomberg, BNY}

APAC PMIs to confirm growth as tariffs loom

The focus on China’s push to be viewed as a new safe haven and the reality of economic growth will clash in the week ahead. The key will be for PMI reports to be robust enough and inflation low enough to help spur new investment flows in the second quarter.

In APAC this week the focus will on the regional Purchasing Manager Index (PMI). China February PMI manufacturing and non-manufacturing were both in expansion territory. We will be looking to see if the new export order sub-component remains in the contraction zone and lags behind the recovery in new orders, which expanded in February to 51.1. Service business activities within non-manufacturing sectors, which flattened to a neutral 50 level, will also be closely watched as domestic consumption is the top priority in 2025. We are looking for stabilization in construction business activities, which have been volatile, alternating between expansion and contraction since Q4 2024. There are many idiosyncratic developments within APAC, such as political uncertainties in South Korea, renewed growth concerns in Indonesia and the lingering impact of the earthquake in Thailand and Vietnam, adding to equities outflow pressure. We will see if regional PMIs can sustain recent broad improvement, with the exception of the Philippines, which has been on a downward trajectory from its December 2024 high.

There will also be March inflation releases from South Korea, Thailand and the Philippines. Inflation within APAC had been declining since the beginning of the year, dragged down by falling crude oil prices. The lower inflation trajectory is likely to add to rate cut pressure in the region, despite the financial stability argument having kept some central banks in the region on the cautious side. Elsewhere, South Korea will release March exports data, and Singapore, Australia and New Zealand will release their latest housing prices.

In terms of foreign equities flows, we have observed a divergence of sentiment, with positive net inflows in India and reduced outflow pressure in South Korea, against continued outflows in Thailand and Indonesia, while Taiwan outflows matched the monthly record set during the Covid-19 pandemic in March 2020 of around $12bn. As for China, iFlow data showed consistent inflows into Chinese equities. Lastly, the Reserve Bank of Australia is the only regional central bank meeting this week and there will be a shortened trading week in China and Hong Kong because of the Ching Ming Festival on Friday.

_{EXHIBIT #5: CHINA PMI KEY FOR RISK IN APRIL}

^{Source: S&P PMI, Bloomberg, BNY}

Bottom line

The uncertainty of U.S. tariffs will be resolved in the next week, at least in part, and the size, scope and reach will become clear. This puts the current fear levels about recessions or stagflation into perspective. The key economic data for March will start with the ISM survey and U.S. jobs data, which will drive risk trading across markets. We have seen significant shifts in the Q1 outlook for U.S. growth, with forecasts declining sharply even as models suggest a steadier state of 1.5% GDP growth. Consider the New York Fed’s Nowcast, which calls for Q1 GDP growth of 2.9%, while the Atlanta Fed forecasts -0.5%. Investors look likely to be happy to take the average (1.4% Q1 GDP growth), and that is the risk for the month and week ahead as any good news may be a surprise to a market beaten down by a winter of geopolitical headline noise.

Calendar for March 31-April 4

Central bank decisions

Colombia BdlR (Monday, March 31) – No change expected in the overnight lending rate in Colombia. With tariffs due up from the U.S., most of Latin America will need to maintain vigilance, and Bogota has already had some prior experience in managing tariff risk with the current administration, which may provide some relief. Inflation is currently running at over 1% on a month-on-month basis, which requires tight financial conditions to remain in place.

Australia RBA (Tuesday, April 1) – No change expected by the RBA and now with the election called, policy will need to tread a bit more cautiously. Given the cost-of-living crisis is a core part of the electoral campaign for parties in the country, evidently inflation expectations remain elevated, and the RBA will need to maintain its current stance for now to manage such risks. Annualized CPI is now at 2.7%y/y on a trimmed mean basis, which has generated a small buffer for real rates. AUD valuations may adjust higher accordingly.

Poland NBP (Wednesday, April 2) – No change is expected by the NBP, with rates expected to stay high at 5.75%. Given the inflows into the economy of late, there is every prospect of financial conditions being too loose, though this would be offset by some of the strength in PLN. However, inflation is expected to rebound to 5%y/y, and NBP will be looking for additional price risks if German spending picks up aggressively, with spillover into the CEE industrial chain.

^{Source: BNY}

^{Source: BNY}

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