More volatile US economic data

In recent months, US equities, parts of the bond market and the US dollar, in particular, have been marked by high volatility and significant valuation corrections. This is due in part, but not solely, to the US government’s current list of priorities, which has diverged from market expectations. The White House appears to be placing greater emphasis of a restructuring of global trade tariffs rather than prioritising low taxes for US companies and consumers, as had been hoped for by the consensus. While tax cuts may still lie ahead, high volatility in US economic data is a fact – driven by the uncertainty over trade policy and the unpredictability of the US administration.

Economic developments on the other side of the pond have recently been strongly influenced by political decisions and erratic communication from the US government. As a result, economic data in the first quarter showed less momentum, although this can be attributed to a sharp increase, and pre-emptive acceleration, of goods imports prior to the tariff hikes taking effect. In particular, the US administration’s trade policy, which is difficult for companies and households to assess, has led to uncertainty, with multiple shifts in statements making it practically impossible to definitively quantify the tariff increases.

The duration, final scale and scope of the raised US tariffs (with certain product exemptions) and ultimately the reaction of all trading partners, which remains to be seen, make it especially difficult to formulate a clear assessment of the US economy.

To date, the tariff increases have had three impacts: firstly, consumer activity in the US has slowed during the year to date compared to the previous year. Secondly, consumer sentiment in the US has deteriorated, particularly as inflation expectations for the future have clearly risen. And thirdly, uncertainty surrounding US trade policy has dampened corporate investment appetite, and not only in the US. The US government’s hope of bringing industrial production back to the US through tariff hikes and thus creating more jobs for the middle class has yet to be achieved. This objective is likely to remain a difficult undertaking, especially if wage growth, inflation and yields on US government bonds are all to remain low, as the administration wishes.

On the other side of the coin, the US economy should not be written off quickly. US unemployment remains at a low level by historical standards, even if it may tick up over the months ahead owing to uncertainty among companies with respect to investments. Activity on the US housing market and US corporate earnings have also come out better than expected so far. Nevertheless, caution is warranted, as the US tariff increases will generally have a “stagflationary” effect, meaning stagnated economic growth combined with rising inflation. On the one hand, this means that economic momentum is dampened. On the other, inflationary pressure is likely to increase as higher import tariffs are passed on to the prices of consumer goods. However, it remains to be seen whether the slow decline in service prices can offset the inflationary effect of the tariff increases.

In light of this uncertainty, it would now come as no surprise if the US Federal Reserve (“Fed”) were to delay any major interest rate moves until clear trends emerge. This is appropriate, as the Fed is known to have a dual mandate, namely to bring inflation close to its year-over-year target of 2% and to ensure a stable labour market. This means that if unemployment begins to rise significantly, the Fed could respond with more decisive interest rate cuts, helping the economy in the process.

In conclusion, risks to the US economy are currently set to increase as long as the US government continues to prioritise tariff increases over the lower taxes it has also planned. Accordingly, two developments would not come as a shock: firstly, an increase in the risk premium that international investors demand for US investments, with this being reflected in valuation corrections for both US investments and the greenback. And secondly, continued volatility in global, and especially US, economic data for some time to come.

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_{This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. The future performance of investments cannot be inferred from past price performance. In other words, the value of investments may increase but may also decrease, and the investor may be required to make additional payments for certain products. In certain circumstances, figures may refer to reporting periods of less than five years, which could reduce their validity. Predictions for the future are always non-binding assumptions. Figures presented in foreign currencies are also subject to exchange rate fluctuations, which can affect their performance. The information in this publication is in no way to be understood as an assurance of future performance. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets.}

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Editorial deadline: 8 May 2025

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