News of the week summary - 23/03/2025

Fed lowers growth forecasts 

The Federal Reserve has revised its economic projections, significantly lowering its growth forecast while raising its inflation outlook, citing concerns over Donald Trump’s tariff policies and planned cuts to government spending. The central bank now expects GDP to grow by just 1.7% this year, down from previous estimates, and inflation to rise to 2.7%.

Following a two-day policy meeting, the Fed chose to maintain interest rates within the 4.25%–4.5% range, opting for caution amid growing economic uncertainty. Fed Chair Jerome Powell acknowledged that Trump’s proposed tariffs on key U.S. trading partners have factored into the bank’s updated inflation and growth expectations. Powell indicated that the Fed is in “no rush” to adjust rates, given the uncertainty surrounding trade policies and their economic impact.

In an effort to ease financial conditions, the Fed announced a slower pace of quantitative tightening, reducing the monthly runoff of Treasury holdings from $25 billion to $5 billion beginning in April. Following the announcement, U.S. stocks rose, with the S&P 500 gaining nearly 1%, while government bonds rallied, pushing the 10-year Treasury yield down to 4.26%.

The latest forecasts represent a notable shift from the Fed’s December projections, which had anticipated 2.1% growth in 2025 with inflation at 2.5%. Analysts warn that this new outlook resembles a stagflation scenario, where slower economic growth coincides with rising prices.

The Fed faces a dilemma: should it prioritize economic growth by cutting interest rates, or should it focus on inflation control, potentially requiring higher rates? Four FOMC members now favor keeping rates unchanged, compared to just one in December, reflecting growing uncertainty over economic conditions.

Turkey’s Lira in turmoil

Turkey’s financial markets have been thrown into disarray after the arrest of Istanbul mayor Ekrem İmamoğlu, a major political opponent of President Recep Tayyip Erdoğan. The move sent shockwaves through investor circles, triggering a steep decline in the Turkish lira, which at one point lost 11% of its value against the dollar. In an attempt to stabilize the situation, Turkey’s central bank launched an unprecedented currency intervention, spending nearly $12 billion in a single day to prop up the lira—the largest such operation in its history.

The abrupt collapse in market confidence reflects deep-seated investor fears about political instability and its impact on Turkey’s economy. As foreign investors rushed to exit Turkish assets, the BIST 100 stock index (which tracks the 100 most valuable companies listed on the Turkish stock market) suffered its worst week since the 2008 financial crisis, plunging 8%. Local financial institutions also struggled, with liquidity in lira markets drying up as demand for safer foreign currencies surged.

To contain the fallout, the central bank held an emergency meeting, leading to an overnight interest rate hike. This measure was aimed at discouraging Turks from converting their lira savings into dollars, a common reaction during currency crises. Although the intervention helped slow the lira’s decline, it depleted foreign reserves and raised concerns about the sustainability of such aggressive market interventions.

Beyond the immediate market turmoil, this crisis threatens Turkey’s broader economic reform agenda, led by Finance Minister Mehmet Şimşek. His policies, including steep interest rate hikes and tax increases, had begun to stabilize Turkey’s battered economy following years of unorthodox monetary policies under Erdoğan. Inflation, which had reached a staggering 85% in late 2022, had since eased to 39%, while Turkey had been gradually rebuilding its foreign currency reserves.

However, the latest political developments could derail investor confidence just as Turkey was beginning to regain credibility in global markets. If uncertainty persists, the lira could face renewed pressure, forcing policymakers to choose between further rate hikes—which could slow economic growth—or continued currency interventions, which would further erode foreign reserves. Either path presents serious challenges for an economy that remains highly vulnerable to external shocks.

Investors reduce allocation to U.S. equities by record amounts

Investors have sharply reduced their allocations to U.S. equities this month, marking the largest cut on record, according to Bank of America’s latest fund manager survey. The sell-off comes as concerns over Donald Trump’s trade policies and stagflation fears weigh on sentiment, leading to a dramatic shift in market positioning.

The survey revealed that U.S. equity allocations plunged by 40 percentage points, dropping from a net overweight position of 17% in February to a net underweight of 23% this month. This represents the steepest month-on-month decline in sentiment since the market turmoil of March 2020. Investors, who had started the year bullish on U.S. stocks, are now exiting the market at an unprecedented pace.

European equities have been the primary beneficiaries of this shift. Allocations to Eurozone stocks surged by 27 percentage points, reaching their highest level since July 2021. This rotation out of U.S. equities and into European stocks is the most significant since Bank of America began tracking the data in 1999. Fund managers attribute the move to growing dissatisfaction with U.S. economic policy, with some arguing that the American stock market had been “priced for perfection” while uncertainty surrounding White House policies made it increasingly unattractive.

Investor skepticism toward U.S. exceptionalism is also on the rise, with nearly 70% of respondents believing that the period of U.S. market outperformance, which followed Trump’s election victory, has now peaked. Technology stocks, once a favorite among investors, have seen allocations fall to a net underweight position of 12%, the lowest in more than two years. In contrast, fund managers have increased their holdings in utilities and banking stocks, while also adding to their positions in UK equities.

Despite the equity sell-off, there has been no corresponding flight to government bonds, which typically benefit in times of heightened market uncertainty. Bond allocations fell slightly, and most investors remain underweight in the asset class. Investor cash levels ticked up slightly to 4.1%, but analysts suggest this is more a case of portfolio rebalancing rather than outright risk aversion.

Market strategists emphasize that this shift does not necessarily indicate the start of a prolonged bear market. Instead, it reflects a rapid unwinding of concentrated trades from earlier in the year, as investors adjust their portfolios in response to changing macroeconomic conditions. 

Bank of Japan holds rates 

The Bank of Japan (BoJ) has decided to keep interest rates unchanged at 0.5%, citing growing concerns over global trade tensions and potential economic downturns in the U.S. The unanimous decision, expected by most economists, reflects Japan’s cautious approach as it navigates economic uncertainty stemming from U.S. trade policy and domestic inflation challenges. 

BoJ Governor Kazuo Ueda emphasized the unpredictability of U.S. trade policy, particularly Donald Trump’s evolving tariff measures, which could impact Japan’s export-driven economy. Japan’s policymakers are particularly concerned about the possibility of new tariffs on Japanese automobiles, which Washington has suggested could take effect as early as April. Japan’s Trade Minister Yoji Muto has sought exemptions from U.S. Trade Representative Howard Lutnick, but so far, no guarantees have been secured.

Although many economists expect the BoJ to raise rates again later this year, some believe the likelihood is fading as uncertainty over trade policy and inflation pressures persist. The central bank remains in a delicate position, balancing the need for monetary tightening with the risks posed by trade disruptions and consumer sentiment shifts.

Nvidia pledges massive U.S. investment

Nvidia has announced plans to spend hundreds of billions of dollars on American-made chips and electronics over the next four years, a move that signals a significant shift in its supply chain strategy. The decision comes as the company braces for potential tariffs on Asian imports under former President Donald Trump’s “America First” trade policies, which could return if he is re-elected.

Nvidia is a leading tech company known for its processing units, which power gaming, AI, and high-performance computing. Its chips are crucial for AI advancements, data centers, and self-driving cars, making it a key player in the tech industry.

The company's CEO Jensen Huang revealed that the firm expects to procure up to $500 billion worth of electronics in the coming years, with a substantial portion of that production taking place in the U.S. The company, which dominates the artificial intelligence (AI) chip market, has historically relied on Taiwan Semiconductor Manufacturing Company (TSMC) for its most advanced processors. However, increasing geopolitical risks surrounding Taiwan and Washington’s tightening restrictions on semiconductor exports to China have forced Nvidia to rethink its manufacturing strategy.

Recent investments by TSMC in Arizona, including a $100 billion expansion, have provided Nvidia with a more secure supply chain within the U.S. The company has already begun producing its latest Blackwell AI systems domestically, reducing its dependence on Taiwan’s chip foundries. Huang emphasized that Nvidia is now capable of manufacturing in the U.S. through partners like Foxconn and believes that the Trump administration—if it returns—could further accelerate AI development by ensuring ample energy supply and government support for the industry.

At Nvidia’s annual developers’ conference, the company unveiled its next-generation AI chip and outlined its ambition to build massive interconnected AI clusters that will require enormous computing power. However, Nvidia’s growing dominance in AI chips has made it a key target of U.S. export restrictions on China, particularly under Biden-era controls set to take effect in May.

Despite these restrictions, Nvidia continues to generate billions in revenue from China, though it now faces tough competition from Huawei. The Chinese tech giant has been making strides with its Ascend AI chips, presenting a growing challenge to Nvidia’s leadership in the sector. Huang acknowledged Huawei’s rapid advancements, calling it “the single most formidable technology company in China”.

As geopolitical tensions intensify, Nvidia’s strategic pivot toward U.S.-based manufacturing underscores a broader trend among major American tech firms seeking to fortify their supply chains against political and economic disruptions. However, whether this shift will insulate the company from future trade conflicts remains to be seen.