Tariffs on Hold, But Not Off the Table

Archive edition · Market data and company circumstances reflect 12 April 2025, when this newsletter was sent.

Trump’s Tariff Pause: A False Sense of Security?

After a rollercoaster week of market volatility triggered by tariff shocks, we’re witnessing some much-needed relief. Markets have bounced back sharply following a pause in proposed tariff hikes.

But let’s not mistake this for a return to smooth sailing. The recovery, while dramatic, is a repricing back to cautious optimism—not a signal that risks have disappeared.

Let’s analyze the implications for your portfolios, and share actionable takeaways for investors and traders navigating a market still teetering on the edge of uncertainty.

A Week of Market Whiplash

Let’s rewind. It started with rising fears around aggressive tariff proposals announced on April 2. These policy shocks spooked global investors, dragging down equity markets, rattling the US Treasury market, and injecting fresh anxiety into economic growth forecasts.

Fast forward to April 9. The announcement that some tariff proposals would be paused sparked a sharp market rebound. Equities soared. Treasury yields stabilized. Risk assets breathed a collective sigh of relief.

Market reverses growth downgrade and hawkish policy shock on tariff pause

But here’s the catch: This isn’t a new bull market signal. It’s merely a repricing back to Goldman Sachs’ baseline forecast of “weak but non-recessionary” growth.

From Panic to Pricing in Stability

The shift in risk sentiment between April 2 and April 9 was extraordinary. In fact, the April 9 rally marked the largest one-day upgrade in market-implied U.S. GDP growth expectations since the Covid crash in March 2020.

But while this relief was necessary and welcomed, it doesn’t mean the coast is clear.

• The rally reversed about 75% of the downgrade from April 2.
• Market-implied 1-year US GDP growth rose by an estimated 95 basis points.
• Treasury markets, which had shown early signs of dysfunction, stabilized.
• Policy rate expectations cooled off as fears of a hyper-hawkish Fed receded.

Where Do We Stand Now?

Economists have reaffirmed a “baseline” outlook of slow but positive growth over the next year, steering clear of an outright recession.

The catch? Markets now seem fully priced for that slow-growth scenario—without adequately accounting for the sizable 45% chance that a recession could still materialize.

In other words, despite the recent rally:

Markets remain highly vulnerable to any signals of an economic downturn.

This disconnect could open the door to opportunities—but it also suggests that risks may be underestimated.

The Tariff Situation: Relief, But Not Resolution

What triggered this week’s turmoil?

A proposed set of sweeping tariffs shocked the market which includes:

The April 9 policy reversal didn’t scrap these proposals. It simply paused some of the worst elements. That’s a temporary reprieve—not a structural solution.

• A 10% blanket tariff across imports.
• More than 100% tariffs on Chinese imports.
• Threats of sector-specific tariffs.
• A plan to implement large reciprocal tariffs after a 90-day pause.

Key Implications:

• Effective Tariff Rate Still HighEven with the pause, the implied increase in tariffs (estimated at ~15 percentage points overall) is substantial. This is materially higher than market expectations before April 2.
• Policy Uncertainty PersistsBusinesses and consumers face major uncertainty. Long-term planning—capital expenditure, hiring, investment—is likely to stall if future tariff direction remains unclear.
• Global Investor Confidence WaversInstitutional investors, particularly overseas, are starting to question their exposure to US assets. This erodes support for both equities and Treasuries.
• USD Weakness Likely to ContinueDespite temporary flight-to-safety flows, structural pressure on the USD remains. Goldman still sees a weak dollar trend and steeper yield curves as intact.

Inflation Watch: Relief or Red Flag?

While markets were fixated on the recent tariff policy reversal, March’s Core Consumer Price Index (CPI) data quietly offered a softer-than-expected reading, suggesting some relief on the inflation front—but not without important caveats. Core CPI rose just 0.06% month-over-month, undershooting expectations, while the year-over-year rate eased to 2.79% from 2.85%. Headline CPI even declined by 0.05%, thanks largely to a 2.39% drop in energy prices, which helped offset a 0.44% increase in food costs.

Beneath the surface, however, the story is more nuanced. Much of the downside surprise was driven by steep drops in travel-related categories such as airfares, hotels, and car insurance. These components alone shaved about 12 basis points off the core number, muting what might have otherwise been a firmer print. The weakness in these areas likely reflects a combination of softer business and government travel demand, reduced foreign tourist spending, and seasonal post-holiday adjustments.

Meanwhile, the most persistent parts of inflation—especially housing—continued to climb. Rent of primary residence and Owners’ Equivalent Rent both posted solid monthly increases, underscoring how shelter costs remain the biggest obstacle in the Fed’s path to reaching its 2% inflation target.

Portfolio Strategy: What Should You Do?

In light of the latest economic signals and market dynamics, investors may want to adjust portfolios with a more defensive and balanced approach. The front-end and belly of the yield curve offer opportunities for duration plays that can act as effective hedges in uncertain environments.

High-quality fixed income becomes increasingly attractive, especially if recession risks rise, offering stability and predictable income. Within equities, defensive sectors like healthcare, utilities, and consumer staples may outperform given their resilience in slower growth periods.

For global investors with U.S. exposure, maintaining USD hedges could help protect against currency volatility.

At the same time, caution is warranted. Overexposure to U.S. equities—particularly without downside protection—may prove risky if economic momentum falters. Long-duration Treasuries have shown fragility, especially in scenarios where inflation re-accelerates. And while the recent market repricing may look promising, it could be premature—aggressive risk-taking at this stage may backfire.

To manage risks more effectively, investors should consider option-based protection, such as puts on broad indexes, and explore non-correlated assets like gold or other real assets. Regular rebalancing is also essential, especially to trim exposure to sectors that may be hit hardest by tariffs.

Tariff-Sensitive Categories: No Surprises (Yet)

Several CPI subcategories flagged as early indicators of tariff impact—such as apparel, furniture, education, and communication services—showed modest increases in the latest data, all within expected ranges.

So far, there’s been no inflation shock, but this remains a key area to monitor. If tariff hikes resume after the current 90-day pause, the lagged effects of rising import costs could begin to show more clearly in the months ahead.

Labor Market: Still Solid, No Signs of Cracks

March’s initial jobless claims came in steady, rising by just 4,000 to 223,000—right in line with expectations. The four-week average held unchanged at a historically low level, reinforcing the picture of a resilient labor market. Continuing claims also surprised to the downside, falling by 43,000 after a rise the previous week, signaling no emerging weakness in employment trends.

Federal claims continued their sharp decline, now down to just 508 from a peak of 1,634 in late February. While there were modest state-level shifts—like a 7,000 rise in California and a 3,000 drop in Kentucky—overall, the data supports the view that the job market remains firm, giving the Fed little urgency to pivot toward rapid rate cuts.

The Inflation–Policy–Market Puzzle

That mix is fragile. Any surprise—whether it’s a sticky CPI next month, renewed tariff escalation, or signs of job market softening—could unnerve investors.

• Inflation appears to be cooling—but not fast enough in rent-heavy categories.
• Tariffs, while paused, are still priced in at higher effective levels—and their inflation impact may be delayed.
• The labor market remains tight—meaning wage pressures could persist.
• And yet, markets have rallied sharply, pricing in an ideal scenario: growth, disinflation, and policy easing.

Archive note

This article preserves the analysis in our weekly newsletter sent 12 April 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.