April 7th, 2025 - US: The Fall from Grace.

The long-standing US exceptionalism has started to being questioned. The country which has excelled in technological and scientific innovation, embraced entrepreneurship as well as being the founder of some of the most admirable educational institutions in the world is now being driven into isolation, democratic decay and domestic polarization. Foreign investors are fleeing the market en masse and century-long allies are being alleniated and are preparing their own attack. Trump wishes to "divide and conquer" the world, by making deals with each country separately, as he is the "Master of Deal". Having fallen into bankruptcy several times, he could be responsible for turning the US into a pariah state instead.

We are obviously exaggerating by hinting that the US "empire" is about to end, as it eventually happens with all empires. But the new US administration is doing a rather good job at it. We could perhaps ignore Trump's affinity for Putin and we could overlook his willingness to find consitutional loopholes to serve for a third term. We could bypass the fact that the new Health Secretary is a conspiracy theory lover and an anti-vaxxer and we could also forgive the choice of a Colgate-smile journalist for Secretary of Defense who found himself passing classified war plans to a journalist (and the world) on a Signal chat. We can even try to forget the Nazi salute of the chainsaw-holder Mr. Musk. But when it comes to Trump's economic policy that affects the world, we must be harsh. The proposed tariffs, if they stay for long, will have a severe impact on global trade, on US consumers and eventually lead to a recession or depression. If they are just a negotiating tool, someone must tell him that global economic affairs with allies and friends are not a game of poker.

Trump's decisions are raising the weighted average tariffs on US imports from 2.5% as of end 2024 to 24%, levels not seen since the 1920s. Both the magnitude of reciprocal tariffs imposed per country and the set of countries they were imposed on were larger than anyone had reasonably anticipated. That they come on top of a 10% universal tariff is an added shock. What comes next will determine whether we move into a full blown trade war or tariffs finally settle at a much lower rate. For starters, China retaliated with a 34% tariff imposed on all US imports. Europe is preparing its own bazooka, with its Anti Coercion Instrument (ACI) which is already in place since 2023 and could use it for the first time ever on the US , instead of China.., for whom it was originally intended. Mr. Trump has chosen to ignore the fact that the US has a large trade surplus with Europe on Services (as it has a large deficit in Goods). Europe could use the ACI to attack the US financial services, consulting and Technology firms. US companies could be excluded from the annual 3trillion$ worth of procurements in the EU, which would be a nuclear type of response with unknown consequences. Trade wars are bad for everyone.

Equities had their worst week since the pandemic, with indices in Europe and the US losing 8-10%. The defensive sectors (Staples, Utilities) provided some cushion to portfolios with losses less than 2%, while US Technology was the worst sector with a 12% drop. Nasdaq is now more than 20% lower since the Trump election bump, which is the common definition of a bear market. Markets are expected to sell-off at the open today, as well. The deeply oversold technical conditions as well the extreme bear sentiment can definitely result in a bounce in the next days or weeks. The issue is whether equity markets have shifted to a "sell the rally" mode , which will put a ceiling on price appreciation for the foreseeable future.

Bonds rallied, demonstrating their hedging ability in times of stress. Of course we are talking about the highest quality bonds and not the riskier segments (high yield) which suffered a significant spread implosion. The US high yield spread (the difference in yield compared to the Treasuries) jumped to more than 450bp, from the record low of 280 just a few weeks ago. In case of a recession this spread can easily move to 600bp+. If we finally avoid a recession, those levels would have been a great buying opportunity. The 10-yr Treasury yield fell to a low of 3.95%, a whopping 85bp fall from the recent highs, which translates to a 5%+ price gain. This is not enough to cover the equity massacre but at least it has provided some gains to portfolios.

The US purchasing manager indices continued to weaken in March. The ISM Services index fell 2.7 points to 50.8 in March, close to the 50 breakeven level and below consensus of 52.9. Looking at the component detail, the business activity index rose 1.5 points to 55.9 in March. The new orders index dropped 1.8 points to 50.4. Meanwhile, the employment index fell into contractionary territory for the first time in six months, tumbling 7.7 points to 46.2. The ISM manufacturing composite also fell 0.6 points to 50.3 in February, below consensus (50.8). The prices component rose 7.5 points to 62.4, its highest point since June 2022, though the index reached much higher levels at the beginning of the inflation run-up in 2021, peaking above 90. The employment index, which was weak for much of 2024, fell 2.7 points to 47.6.

The US labor market was rather stable in March, perhaps the calm before the storm. The non-farm payrolls were announced at 228k, above expectations for an increase of 140k. The headline beat is less impressive if we take into account that prior months were revised down a cumulative 48k, leaving the year-to-date average pace of gains at 152k. According to analysts the very warm weather in March could have boosted the one-month job gain by 20k to 80k in our models, and in addition, 15k employees returned from strikes. In March, federal government employment fell 4k in March, which begs the question of what the DOGE is really doing or how reliable are the data. The unemployment rate barely moved to 4.15% from the 4.14% in February.

Eurozone March inflation moved lower, as expected. The headline CPI declined 0.1pp to 2.2% y/y, in line with consensus expectations, while Core inflation moved down to 2.4%, vs expectations for 2.5%. The fall in energy prices contributed significantly to the healdiene decline. The fall in core inflation, in turn, was driven by lower services inflation (-0.3pp to 3.4% y/y) helped by the later timing of Easter this year, implying smaller annual price increases in travel related services. All in all the data is consistent with another rate cut by the ECB on the 17th of April , especially now that the global economic environment has had seismic shifts.

Chart of the Week : US Consumer sentiment has plunged.

The below chart shows the Business Conditions index of the University of Michigan Consumer Sentiment survey. A record high share of consumers think that business conditions are worsening. There are numerous other data which show a similar picture, let alone the announcement of large corporations which have recently highlighted that the consumer has been slowing his visits and purchases since mid-January. And that was before the fresh news and the equity sell-off which impacts significantly the net wealth of the average American and consequently their propensity to spend. Consumer spending accounts for 65% of the US economy. The path to a recession if things do not change rapidly is clear. Despite the steep fall in the S&P500, valuations do not discount a recession, so any rally will be short lived under current conditions.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

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• Sources: Chart of the Week : Apollo Management, Photo: Adobe stock