Key Highlights

• FOMC minutes, Q1 earnings, U.S. CPI and other central banks key as risk of global recession is at 50%
• Credit concerns rise with slowdown fears and $5trn market cap lost
• Next week is unlikely to resolve investor concerns around policy concerns 

What you need to know

As a result of ongoing policy uncertainty and the implications for the economy, investors continue to avoid risk and search for safety. The volume and pace of the equities selloff in the U.S. on Friday was historic. The key question for the week ahead is whether this is a cathartic market washout event that will force a policy response. The main event affecting global markets last week was “liberation day,” when the Trump administration imposed tariffs averaging 18.8% on countries around the world, the highest tariff levels since 1937. Some nations, such as China, were hit with levies of 54%, while the universal base of 10% was applied to the U.K. Flows of equities were the most dramatic, as the Nasdaq fell into bear market territory (defined as a decline of at least 20% from the market peak), while EU shares gave back their entire gains for the year. There is a clear home bias, with the USD seeing the largest weekly inflows in FX, up 1.7 standard deviations. With respect to bonds, the Eurozone and German Bunds came out on top. As for equities, it was emerging markets, which had been sold from Indonesia to Poland. Investors are trying to figure out when markets will find a bottom to risk aversion and what is safe until that happens. Gold’s reversal from its highs surprised many investors, driving further fears of forced position liquidations due to leverage and higher volatility. The only U.S. sectors with weekly gains were Utilities and Materials, with all sectors that rose in the first quarter seeing significant selling, led by Health Care. The selling was driven by fears of further tariffs on pharmaceuticals as well as expectations of retaliatory levies on U.S. communications providers by countries around the world.

_{EXHIBIT #1: U.S. EQUITIES SELLING SHOWS REVERSAL OF FLOWS AND A NOTABLE SHIFT IN SHORT POSITIONING}

_{Source: BNY iFlow (*as of Thursday close; does not reflect Friday moves)} 

When short utilization jumps over short borrowing, it indicates a drop in sector holdings. 

Questions about equities globally dominated flows in all other asset classes last week. Bonds and stocks are now correlated, as lower stock prices drive yields lower and hopes for central bank rate cuts in the week ahead. We expect cuts from India, New Zealand and the Philippines, but there is risk for more dramatic action should the liquidity in markets prove too fragile. The risk of more action makes this week both historic and problematic.

Our take: The outsized moves across global markets – from equities to FX to bonds and commodities – highlights the shock of current shifts in economic expectations around the uncertainty of tariffs and policy coordination. Such volatility has not been seen on a sustained weekly basis since the global financial crisis in 2008. Volatility serves as an important guide to coordinated central bank and G10 finance ministers to act is an important risk for the weeks ahead.

Forward look: The next shoe to drop for markets revolves around credit. The one problem investors have in the U.S. is that private credit and equity are opaque and much of the CDS and basis swap moves are primarily about financials. There is a risk that the FOMC is late to ease fearing inflation over growth risks. Powell’s speech coupled with stronger U.S. nonfarm payrolls left markets with a higher level of uncertainty. This isn’t going to be resolved in the week ahead without a larger, coordinated action globally. There is room for more short positioning and volatility across markets.

What we’re watching

U.S. markets sifting strong data for Fed shift

While U.S. payrolls were surprisingly strong and as “Liberation Day” is behind us, we still don’t think that uncertainty will be alleviated for investors anytime soon. Between retaliation fear – with China the most immediate example with 34% levies on U.S. goods  – and the fact that the March employment data were seen to be somewhat stale and reflecting the pre-tariff era, more shoes will drop, as we await signals from hard data to come.

This week offers price data and a new preliminary University of Michigan Consumer survey. The former will go some way in helping us gauge short-term Fed policy expectations, while the latter will probably show more deterioration in household sentiment. Recall the Michigan series has been showing the highest long-term inflation expectations of the main forward-looking indicators. 

As for the Fed, there are a number of speakers, and we’ll continue to sound out the officials’ view on inflation versus growth in the context of the central bank’s dual mandates. Other than Powell, many speakers to date have indicated more concern over sticky inflation and potential additional price rises from the tariffs. So, combined with the inflation data, we could see some repricing of Fed expectations, however we suspect that the overall message will be somewhat down the middle, keeping the market leaning to the dovish side as it is currently priced for around five cuts by December.

We maintain our projection of two cuts – for now. We think the Fed will not be able to cut rates until data on jobs and growth start to disappoint, leaving them somewhat behind the curve once cuts start. Thus, there is some risk to our view and policy easing could intensify. The Fed minutes on Wednesday this week could matter, as we’ll hear more about the debate on how the Fed is thinking about tariffs and other policy changes. Expect the word “uncertain” to appear frequently in the text.  All of these points show up in both the U.S. stock market and the USD, with most investors anxious for a bottom in prices but dependent on inflation, which could be a block to easing ahead.

_{EXHIBIT #2: NEXT FOCUS FOR U.S. EQUITIES IS INFLATION AND FED POLICY}

^{Source: BLS, Bloomberg, BNY}

Waiting for the EU tariff response, growth data, ECB speakers

European leaders have strongly condemned the new U.S. tariffs imposed by President Trump, with European Commission President Ursula von der Leyen warning of a “major blow” to the global economy and confirming that the EU is preparing retaliatory measures. ECB President Christine Lagarde echoed these concerns, stating the impact “will be felt the world over.”

Spain has already proposed a €14.1 billion support package, while the U.K. is urging calm and maintaining trade dialogue. Germany and France are leaning toward a firmer response, but negotiation is still expected to be the EU’s first move. The EcoFin Friday informal meetings are likely to be key in their unified approach. In iFlow, EUR positioning remains neutral on both aggregate and cross-border levels, leaving room for investors to add to longs. Such FX flows will test the ECB’s tolerance for currency strength in a weak growth environment. This leaves numerous ECB speakers, including President Lagarde, as key for understanding how the central bank will respond to market volatility.

Growth data from the U.K. on Friday and the EU retail sales report Monday bookend the economic releases for the week. They matter in the context of how the ECB views the EUR moves and tariff risks. Adding to the mix is the final German CPI report. There is clearly a fear of a surprise growth shock counterbalancing EU growth hopes from a newfound willingness to spend.

_{EXHIBIT #3: EUR HOLDINGS SUGGEST ROOM FOR MORE APPRECIATION}

^{Source: Bloomberg, BNY}

Look for further recovery signs in China

The increasing trade war between the U.S. and China is dominating the trading of risk. But the length of the conflict depends on the willingness of the two nations to engage in a dialogue, and that depends on the state of the real economy. The economic data focus this week will be on China’s March credit data as well as the latest inflation releases from China, Taiwan and Indonesia. The market will be looking for further affirmation of China’s growth recovery momentum, and credit expansion tends to be the leading indicator in this regard. China has seen a stabilization and turnaround in aggregate financing, growing at 8.2% y/y in February from November 2024 lows of 7.8% y/y. Such an upward trend is likely to continue, supported by higher central and local government bonds issuance. That said, the loan growth by financial institutions continues to trend lower, dragged down by the ongoing sluggish sentiment in the housing market despite stabilization of prices. We will be paying special attention to medium- to long-term household loans, which is a proxy for mortgage growth. This turned negative in February, suggesting households were paying off debt. Elsewhere, March inflation for China, Taiwan and Indonesia will be closely watched following recent sharp disinflation concerns. China and Indonesia headline CPI fell into negative territory at -0.7% and -0.09% in February, while Taiwan CPI plunged to 1.58%, the lowest since March 2021 of 1.22%. Regional CPI are all at all-time lows and have a limited incremental influence on domestic monetary policy, which hinges on FX financial stability. In addition, the reading for South Korea’s first 1-10 days of exports will shed light on regional export activities, taking tariffs concerns into consideration. Lastly, there three regional central banks – in the Philippines, India and New Zealand – will be making rate decisions this week. The market consensus is that all three will cut rates.

In terms of capital flows, heightened global market volatility and a risk-averse mood has led to continued foreign outflows in the equities complex. This is most acute in Taiwan, where foreigners net sold $18bn in Q1 2025 and there are few signs of a reversal. For China, iFlow data showed a flattening of demand for Chinese equities, but renewed interest in buying Chinese government bonds.

_{EXHIBIT #4: CHINESE LOANS TO FINANCIAL INSTITUITONS HAVE YET TO STABILIZE} 

^{Source: S&P PMI, Bloomberg, BNY}

Calendar for April 7-11

Central bank decisions

New Zealand RBNZ (Wednesday, April 9): RBNZ expected to cut 25bp to 3.5%. The Reserve Bank of New Zealand reviews monetary policy on April 9. The RBNZ’s February easing by 50bp cemented expectations for more easing. Market pricing has also held close to -25bp, though the global turmoil driven by tariffs imposed by the U.S. has seen a small risk of -50bp priced. Intervening domestic data did little to change the outlook, especially with no new quarterly inflation data. Before the NZD weakness inspired by tariff moves, the data supported a slowdown in rate moves ahead. Commentary on the global trade outlook could be key for guidance into the May 28 meeting, when new forecasts will be published. Also, this meeting will be chaired by Acting Governor Christian Hawkesby, who stepped in after the sudden resignation of Adrian Orr. No doubt he will be asked about the domestic implications of the minimum U.S. tariff of 10%, particularly what it means for growth and inflation ahead.

India RBI (Wednesday, April 9): RBI expected to cut 25bp to 6%. We see reasons for them to remain on hold. This expectation is driven by stable, non-inflationary growth and subdued price pressure, allowing for further rate reductions, while acknowledging the potential impact of reciprocal tariffs. On Thursday, the Trump administration announced a 26% reciprocal tariff on Indian exports to the U.S., effective April 9. On that note, the RBI’s FY26 GDP growth forecast of 6.7% is considered slightly optimistic, and the central bank should revise its growth estimates downward. On the inflation front, it is likely that the RBI will undershoot its Q4 FY25 target of 4.4%, given declining oil prices, a stabilizing INR, and weak aggregate demand. Robust food production is expected to mitigate potential inflationary pressures going forward. OIS markets are pricing a 45bp rate cut, bringing the repo rate to 5.80% in the next 12 months, which remains above the estimated neutral rate.

Philippines BSP (Thursday, April 10): The BSP is expected to cut 25bp to 5.50%. However, the central bank is expected to maintain a cautious approach due to global and domestic uncertainties that could fuel inflation, stressing the need for prudence given economic instability, particularly regarding growth and financial stability. The BSP has previously reduced rates by 75bp but paused in February due to external policy uncertainties. The projected balance of payments deficit for the Philippines, coupled with a widening current account deficit, and the interconnected trade relationships with Indonesia hit, with tariffs of 32%, could limit PHP gains, potentially driving inflation higher. This justifies the cautious stance to mitigate these risks and stabilize the economy at future meetings.

^{Source: BNY}

^{Source: BNY}

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