News of the week summary - 04/05/2025

Markets bebound as strong jobs data soothes tariff fears 

U.S. stock markets have staged a full recovery from the sharp downturn triggered by Donald Trump’s announcement of new “reciprocal tariffs” a month ago. The S&P 500, a broad measure of U.S. equity performance, climbed 1.6% in a single session, surpassing its level from April 2, the day Trump revealed the tariff plan that initially sent global markets into a tailspin.

The rebound was largely driven by stronger-than-expected labor market data. The U.S. economy added 177,000 jobs in April, outpacing economists’ forecast of 135,000. While this was a slight slowdown from March’s figures, it was nonetheless seen as a sign of resilience, especially in light of rising concerns that protectionist trade policies might begin to harm economic fundamentals.

The earlier market plunge, triggered by what Trump called "liberation day", had erased up to 15% from major stock indices as investors feared a trade war. Equities have since bounced back, helped by a shift in tone from Beijing. China's Commerce Ministry reported that the U.S. has expressed interest in engaging in dialogue, fueling hope that tensions may ease.

However, not all analysts are convinced this recovery is built on solid ground. Barclays’ head of global research, Ajay Rajadhyaksha, warned that while markets may be acting as though the worst is over, the economic consequences of the tariffs have not yet surfaced in the data. This raises the risk of a delayed reaction, where the true impact could only emerge in coming months.

Despite the stock market’s resilience, the U.S. dollar remains about 4% lower than its level before the tariff announcement, reflecting lingering uncertainty in currency markets. Meanwhile, bond markets responded to the jobs data by pushing the yield on two-year U.S. Treasury bonds up to 3.83%. Yields rise when bond prices fall, and higher yields often signal expectations that the Federal Reserve will keep interest rates elevated.

Investors had been pricing in multiple interest rate cuts by the Fed in 2025, as markets anticipated an economic slowdown. But after the robust job numbers, the probability of a fourth rate cut this year dropped significantly, from 60% to around 30%. Goldman Sachs also revised its outlook, now expecting the Fed to delay its next cut until July instead of June.

President Trump responded to the labor market data by repeating his call for lower interest rates, urging the Fed to “lower its rate” on his Truth Social platform. Yet ironically, a strong job market reduces the Fed’s urgency to do so. The Fed’s primary mandate includes maintaining stable prices and full employment; when the labor market is strong, it can afford to keep rates higher to fight inflation.

Finally, the April employment data included a notable decline in government jobs, down 9,000 for the month and 26,000 since January, partly linked to cost-cutting measures by the so-called Department of Government Efficiency, reportedly led by Elon Musk. This decline shows that while overall employment is growing, certain sectors, particularly in public administration, are shrinking.

In summary, while Wall Street has bounced back from tariff-related losses and the labor market appears healthy, uncertainty lingers. Markets are balancing optimism about trade talks and economic resilience with anxiety over delayed impacts from policy shocks and the path of interest rates.

Brussels proposes €50 Billion trade offer 

As the clock ticks toward the July deadline for a new wave of U.S. tariffs on European imports, the European Union is scrambling to strike a last-minute deal that would defuse mounting trade tensions. In an effort to avert a full-blown transatlantic trade war, the EU has proposed increasing its purchases of U.S. goods by €50 billion, primarily through liquefied natural gas (LNG) and agricultural products such as soybeans.

The offer, described by the EU’s chief trade negotiator Maroš Šefčovič, is intended to narrow what the U.S. sees as a persistent trade imbalance. The U.S. claims a large trade deficit with the EU, a situation where America imports more from Europe than it exports in return. However, Šefčovič pointed out that once U.S. services exports (like financial services and technology) are factored in, the actual trade gap with Europe shrinks to around €50 billion, a level the EU believes can be addressed relatively quickly.

This gesture comes amid an increasingly high-stakes negotiation process, with both sides holding multiple rounds of talks since early April, when President Donald Trump imposed a minimum 10% tariff on imports from nearly all trading partners and floated an even steeper 20% "reciprocal" tariff specifically targeting the EU. Although those higher levies have been temporarily suspended, they are scheduled to go into effect in mid-July if a deal isn’t reached.

Šefčovič emphasized that Brussels considers even the 10% tariff level too high to accept as a baseline for a lasting agreement. The EU is also resisting any deal that would make such tariffs permanent, especially since they would come on top of existing U.S. duties on European steel, aluminum, and automobiles, which already stand at up to 25%.

Trump has framed his trade policy under the banner of reciprocity, arguing that U.S. tariffs should match or exceed those imposed by other countries. However, many economists note that focusing narrowly on trade deficits can be misleading. A trade deficit doesn’t inherently indicate economic weakness, it simply reflects the difference between national saving and investment levels. Moreover, trying to fix it by manipulating trade policy can often result in counterproductive tit-for-tat measures.

In response to Trump’s tariff threats, the EU had readied retaliatory tariffs on €21 billion worth of U.S. goods, but it has delayed implementing them until July 14 as a sign of good faith while negotiations continue.

Despite what Šefčovič called a growing mutual understanding between the two sides, he acknowledged that sealing a deal acceptable to all 27 EU member states and the European Parliament would be “very difficult.” The complex nature of EU decision-making—where trade agreements must gain wide political approval—adds another layer of challenge to these high-stakes talks.

The underlying risk remains that, if talks break down and tariffs are imposed, both economies could suffer. Tariffs act like taxes on imports, raising prices for consumers and businesses, distorting supply chains, and dampening growth. With global trade already under pressure from geopolitical tensions and tighter financial conditions, a breakdown in U.S.–EU trade relations could add unwelcome strain to an already fragile economic environment.

Japan’s growth outlook dims

The Bank of Japan (BOJ) has sharply lowered its economic growth projections for the next two years, citing rising global trade tensions and the uncertainty stemming from newly proposed U.S. tariffs. The downgrade marks a significant setback for Japan’s central bank, which has been cautiously preparing to move away from its long-standing ultra-loose monetary policy.

According to its latest quarterly forecast, the BOJ now expects Japan’s economy to grow by only 0.5% in 2025—down from its earlier estimate of 1.1%. The 2026 outlook was also trimmed, from 1% to 0.7%. Inflation, which the bank has long struggled to lift to its 2% target, is forecast to slip to just 1.7% in 2026.

Governor Kazuo Ueda explicitly linked the economic downgrade to the ripple effects of higher tariffs, particularly those recently announced by President Donald Trump. These so-called “reciprocal” tariffs have injected uncertainty into global supply chains and trade flows. Ueda warned that both inflation and wage growth in Japan could stagnate as a result, potentially undermining the bank’s strategy to gradually normalize monetary policy after years of keeping interest rates near zero.

The BOJ left its short-term interest rate unchanged at around 0.5%, a level that reflects Japan’s cautious transition away from negative rates, which were in place for nearly a decade. But the central bank signaled that the future trajectory of rate hikes is now far less certain. The committee’s statement emphasized “extremely high uncertainties” in global trade policies, which have made its baseline economic scenario harder to achieve.

The economic mechanism at play here involves both direct and indirect impacts of tariffs. Higher tariffs increase costs for businesses that rely on imports and can reduce exports if retaliatory tariffs are imposed. Japan, an export-driven economy deeply embedded in global supply chains, is especially vulnerable. Uncertainty surrounding trade policy also weighs on corporate investment and consumer sentiment, both of which are key to sustaining economic momentum.

Adding to the complexity, Japanese trade negotiators are currently in Washington, trying to persuade the U.S. to ease or eliminate the proposed tariffs. But even if a deal is reached, Ueda noted, the economic fallout could persist, making the timing and impact of any central bank response difficult to gauge.

Earlier this year, many analysts had anticipated the BOJ would continue a slow, predictable tightening cycle, perhaps raising rates once every six months. However, the new forecasts suggest that such a schedule is now unlikely. The BOJ’s guidance hinted that it would only raise rates further if its outlook on economic growth and inflation proves accurate. In other words, normalization is no longer a given; it’s conditional.

For now, Japan remains caught in a difficult position. Its recovery is fragile, inflation is stubbornly low, and external shocks, like trade barriers, are threatening to stall progress. While the BOJ hasn’t ruled out future rate hikes, the trajectory of both the domestic and global economy will dictate its next move. With real interest rates still near zero, policymakers must walk a fine line between supporting growth and avoiding the risk of renewed stagnation.

China signals willingness to engage in trade talks

China has softened its stance on trade negotiations with the United States, signaling openness to talks despite the ongoing tariff conflict that has strained the world’s two largest economies. This shift comes as both sides seek to defuse the costly trade war that has disrupted global supply chains and weighed on economic activity.

Chinese state media, through a social media account linked to the government broadcaster CCTV, indicated that while Beijing does not require negotiations before the U.S. takes concrete steps on tariffs, it sees “no harm” in engaging with Washington if the U.S. wishes to do so. The post also suggested that U.S. officials have proactively sought dialogue, portraying the American side as the more anxious party eager to resolve tensions. This framing serves to show China as confident and ready to negotiate from a position of strength, which is important domestically to maintain political support.

The backdrop to this gesture is China’s weakening economic data. Factory activity contracted sharply in April, the largest decline since 2023, as export orders slowed considerably due to the tariff barriers. This slowdown highlights how the trade war is damaging China’s export-driven economy, increasing the urgency for dialogue.

Historically, China has conditioned talks on the removal of U.S. tariffs, but this recent softening contrasts with last week’s official messaging that insisted Washington must first roll back steep levies before talks. Analysts interpret the new tone as a tactical move designed to prepare both domestic and international audiences for negotiations, signaling flexibility without fully conceding.

The trade conflict itself began when the Trump administration started imposing escalating tariffs on Chinese imports in February, with rates now averaging around 145%, matched by Beijing’s retaliatory duties nearing 125%. The tariffs function as taxes on imports, aimed at protecting domestic industries or correcting trade imbalances, but they also increase costs for businesses and consumers in both countries.

Despite the diplomatic overtures, U.S. President Donald Trump has made several public claims about ongoing talks that insiders in both countries regard as inaccurate, suggesting negotiations remain complicated behind the scenes.

For markets and the global economy, the possibility of renewed talks offers some relief, as prolonged trade disputes disrupt international trade flows, increase costs, and dampen business confidence worldwide. If China and the U.S. can find common ground, it could ease tensions, stabilize supply chains, and improve growth prospects in both economies. However, progress depends heavily on mutual trust, clear commitments, and the willingness to avoid hostile rhetoric, conditions that Chinese experts say the U.S. must meet for meaningful advancement.