Financial Markets Under Pressure as Trade Tensions and Inflation Take Center Stage | Weekly Market Analysis

Key events this week:

Monday, March 31, 2025

• China - Manufacturing PMI (Mar)
• USA - Chicago PMI (Mar)

Tuesday, April 1, 2025

• Australia - RBA Interest Rate Decision (Apr)
• Eurozone - CPI (YoY) (Mar)
• USA - S&P Global Manufacturing PMI (Mar)
• USA - ISM Manufacturing PMI (Mar)
• USA - ISM Manufacturing Prices (Mar)
• USA - JOLTS Job Openings (Feb)

Wednesday, April 2, 2025

• USA - ADP Nonfarm Employment Change (Mar)
• USA - Crude Oil Inventories

Thursday, April 3, 2025

• USA - Initial Jobless Claims
• USA - S&P Global Services PMI (Mar)
• USA - ISM Non-Manufacturing PMI (Mar)
• USA - ISM Non-Manufacturing Prices (Mar)

Friday, April 4, 2025

• USA - Average Hourly Earnings (MoM) (Mar)
• USA - Nonfarm Payrolls (Mar)
• USA - Unemployment Rate (Mar)
• USA - Fed Chair Powell Speaks

Wall Street wrapped up the week on a sour note as inflation concerns and trade tensions dampened investor sentiment, sending stocks lower. The S&P 500 closed in the red on Friday after a closely watched inflation report showed prices rising slightly more than expected, reducing hopes for an imminent Federal Reserve rate cut. Meanwhile, ongoing uncertainty surrounding trade policy added further pressure to the markets, with investors closely watching for any developments on tariffs.

At market close, the Dow Jones Industrial Average had plunged 716 points (-1.7%), the S&P 500 dropped 2%, and the NASDAQ Composite tumbled 2.7%, marking a rough end to the trading week.

The selloff followed the release of the core personal consumption expenditures price index, a key measure of inflation favored by the Federal Reserve. February’s data revealed that core PCE, which excludes food and energy, edged up to 2.8% year-over-year, surpassing the anticipated 2.7%. The headline PCE figure remained at 2.5%, unchanged from January.

The hotter-than-expected core inflation reading reinforced concerns that the Fed may maintain a cautious approach to monetary policy, delaying rate cuts that investors had been eagerly anticipating. Analysts had previously expected inflation to cool, paving the way for rate reductions. However, with price pressures proving to be more persistent, expectations for aggressive easing are being dialed back. Stifel, a global investment bank, noted that the uptick in inflation challenges the “optimistic and rosy outlook” that some Fed officials had previously suggested.

Beyond inflation concerns, trade policy uncertainty further rattled investors. Growing fears that President Donald Trump’s aggressive tariff stance - targeting both allies and adversaries - could exacerbate inflationary pressures and weigh on economic growth added to the market’s volatility. Consumer sentiment took a hit, falling to its lowest level in over two years. Additionally, long-term inflation expectations among US consumers surged to a 32-year high, signaling increased concern over how trade policies and inflation could impact household finances.

The Australian Dollar found some support on Monday as stronger-than-expected Chinese economic data helped the currency recover some lost ground. China’s latest Purchasing Managers' Index figures showed signs of resilience, with the official NBS Manufacturing PMI rising to 50.5 in March from 50.2 in February. Meanwhile, the NBS Non-Manufacturing PMI improved to 50.8 from 50.4, slightly exceeding market expectations. These figures suggest that China’s economic activity remains steady, which bodes well for Australia, given its close trade ties with the world’s second-largest economy.

Despite the positive data, AUD gains were limited by broader market uncertainty, particularly concerning trade policies. Investors are bracing for a planned announcement on Wednesday by President Trump regarding reciprocal tariffs. Additionally, the Reserve Bank of Australia is set to hold its April policy meeting on Tuesday, where it is widely expected to keep interest rates unchanged at 4.1%. The RBA remains cautious, particularly as the country approaches an election campaign focused on cost-of-living concerns.

The Japanese Yen extended its rally for a second consecutive session on Monday as risk-off sentiment drove demand for safe-haven assets. The USD/JPY pair slid below the 149.00 mark, weighed down by investor concerns over Trump’s impending tariff announcement and broader geopolitical risks.

Adding to the yen’s strength, Japan’s Finance Minister Katsunobu Kato reaffirmed on Monday that excessive currency movements are undesirable. However, his comments did little to halt the yen’s gains as market sentiment remained firmly risk-averse.

Another factor boosting the yen was growing speculation that the Bank of Japan could raise interest rates in May. Friday’s Tokyo inflation report showed strong price pressures in Japan’s capital, reinforcing expectations that the BoJ may shift toward tightening monetary policy after years of ultra-loose conditions. This prospect provided additional support to the yen, as investors positioned for the possibility of higher Japanese rates in the near future.

The EUR/USD pair attempted to recover on Monday after dipping to the 1.0800 level in the Asian session, but its upside momentum remained limited. By mid-morning, the pair was trading near 1.0835, largely unchanged for the day.

The US dollar remained under pressure for the third straight session, weighed down by growing concerns over stagflation in the US. However, the euro’s gains were kept in check by lingering trade worries. The European Commission has reportedly signaled a willingness to offer concessions to avoid being targeted by Trump’s tariffs, but uncertainty remains over how the situation will unfold.

Market participants are now turning their attention to upcoming German inflation data for further clues on the euro’s direction. While the fundamental backdrop favors the euro in the longer term, persistent risk-off sentiment could limit its near-term gains.

Gold prices continued their ascent, climbing to around $3,090 during early Asian trading on Monday. The precious metal remained near record highs, benefiting from heightened risk aversion and escalating concerns over a potential trade war triggered by Trump’s latest tariff threats.

Investors have been flocking to gold as a hedge against both economic and geopolitical uncertainty. With inflation data coming in hotter than expected and trade tensions rising, demand for safe-haven assets remains strong. Analysts believe gold’s rally could extend further if macroeconomic conditions continue to deteriorate.

The GBP/USD pair edged higher to 1.2965 on Monday, supported by robust UK retail sales data. The Office for National Statistics reported that retail sales rose 1.0% month-over-month in February, exceeding market expectations. While this was a slowdown from January’s upwardly revised 1.4% growth, the data still indicated resilience in UK consumer spending.

Despite the positive retail figures, broader market sentiment remains cautious, as investors await key US economic data scheduled for later this week. The upcoming nonfarm payrolls report is expected to provide further insights into the strength of the US labor market and its potential impact on Federal Reserve policy.

As markets brace for a busy economic calendar, investors will be closely monitoring central bank decisions, inflation trends, and trade developments to assess the broader outlook for global financial markets.