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MARKETS

A sharp bounce in stocks Friday gave equity investors a much-needed breather. However, the tremors from Donald Trump’s relentless policy salvos are still shaking global markets, keeping risk appetite on edge.

Yields on German bunds surged as government leaders greenlit a massive infrastructure spending package, fueling a modest recovery in EUR/USD to 1.0880—despite this agreement being well-telegraphed and priced into expectations.

Meanwhile, the ultimate safe-haven asset—gold—blasted through the psychological $3,000 mark for the first time before trimming gains as traders weighed the staying power of bullion’s parabolic move.

The S&P 500’s nearly 2% rally was shaping up to be its most significant since the post-election surge, even as fresh data revealed a troubling dip in consumer confidence. This relief rally followed a bruising 10% correction from recent highs, which sparked a stampede into Treasuries and gold. But make no mistake—this is still a trader’s market, not an investor’s paradise. When sentiment and positioning are this lopsided, the perfect setup for a short squeeze emerges. Today, it was the last-minute government shutdown reprieve that triggered the snapback.

Yet, while the shutdown threat has temporarily faded, the broader macro minefield remains treacherous. A rapidly intensifying trade war, mounting global growth jitters, and the real risk that tariff shockwaves could force the U.S. economy into a painful slowdown continue to weigh heavily on sentiment. So while today’s bounce might offer some breathing room, it’s far from an all-clear signal. With volatility still simmering and no clear “Fed or Trump put” in sight, this market remains a rollercoaster that could take another dive at the next sign of trouble.

The market's nerve center for trade war jitters has rapidly shifted—equities have overtaken FX and bond yields as the most sensitive asset class to tariff headlines. While currencies and Treasuries barely moved this week, stocks were on a rollercoaster ride, with a Friday bounce offering some relief as a government shutdown appears to be off the table.

But while equities were whipsawed, gold took the other route—straight up cementing its status as the go-to hedge in a world where trade risks, inflation concerns, and geopolitical turbulence remain front and center.

For traders, the key takeaway is clear: Watch stocks for tariff volatility, watch gold for risk aversion, and don’t sleep on FX or bonds, as they will return to the battlefield in the next round of the trade war.

FOREX MARKETS

The dollar’s weakness has been largely a one-way street through the euro, and if you've been following my playbook, you know I rode the EU infrastructure and rearmament bounce with a 1.0950 target. But now, the EUR/USD is shifting into a 1.05-1.10 trading range, and dip-buying will likely dominate the price action. That said, unlike the theoretical desk jockeys pumping out conviction-paper trades calling for a euro moonshot to 1.20, FX traders don’t have the luxury of playing fantasy football with the dollar. We trade the here and now while keeping an eye on the macro tea leaves.

Unfortunately, for those who trade FX as a reflection of bond markets, the outlook is as clear as a foggy windshield on a rainy night. Let me explain and keep in mind this is my current playbook, which changes almost weekly, if not daily at times.

At the start of the year, the macro setup was textbook bullish for growth. Trump’s second term was supposed to be about turbocharging the economy with tax cuts and deregulation. Markets assumed tariffs—while inflationary—would keep the Fed from slashing rates too aggressively, effectively putting a floor under the dollar.

Fast forward to today, and that rosy narrative is in shambles.

• Growth optimism? Replaced by tariff-induced uncertainty.

• Fed rate cuts? Still coming, but timing is murky.

• Trump’s fiscal playbook? Spending cuts and protectionism, not stimulus.

Weaker economic prints, trade war anxiety, and zero fiscal pivot from Trump have investors re-evaluating everything. And while I’m not in the recession camp just yet, Powell will likely downplay growth fears in next week’s FOMC.

His March 7 speech was already a preview of that stance:

"Despite elevated uncertainty, the U.S. economy remains in a good place.”

Translation? No rate cuts, and the Fed is on autopilot. Powell is going to hold his fire until he’s absolutely forced to pull the trigger.

Beyond rate cuts, the real sleeper story is the Fed’s balance sheet strategy. Last FOMC, Powell dodged any real discussion on QT (quantitative tightening)—but the minutes told a different story.

• Current QT pace = shrinking bank reserves.
• At this rate, reserves will drop to $3T by mid-2025.
• That’s 10% of GDP—the “danger zone” where liquidity dries up.

The last time the Fed let reserves dip below 7.5% of GDP, the repo market cracked—forcing an emergency intervention. Powell won’t let that happen again. Expect QT to be dialled back or halted entirely before reserves hit single digits.

For Treasuries, this is a structural tailwind.

Once QT ends, the Fed automatically becomes a buyer again, soaking up $50B to $100B a month just to keep its balance sheet stable. That means:

•  More demand across the curve.
•  Softer impact from fiscal-driven Treasury supply.
•  No market meltdown, but no significant rally either.

Bottom line: It’s not a game-changer but removes a potential liquidity crunch risk that could have rattled markets.

If Powell pushes back against recession fears and keeps the market in line with just two rate cuts this year, the dollar could find short-term support. That means:

• G10 outperformers (JPY, Scandis, EUR) could stall.
• EUR/USD might struggle to extend beyond 1.10.
• Short squeeze potential in USD.

That said, my more considerable bias remains dollar bearish—but the real trade is short USD only when the Fed pivot starts to show up on my daily tarot cards. Until then, I’m trading tactically.

What is the biggest surprise from Trump’s second-term policy agenda?

 No stimulus.
 Spending cuts.

The result? Job loss fears—not just for federal workers but also for private contractors. The tariff blitz is another wildcard. If Trump follows through on reshoring efforts, companies will:

• Face higher costs.
• See margin compression.
• Watch consumer spending slow.

And let’s not forget the reciprocal tariffs from global trade partners, which could torpedo US exports and compound the problem.

The market takeaway?

• Powell will try to sell a soft landing, but traders aren’t buying it.
• The Fed will be forced into more aggressive easing if growth slows too much.
• That’s where the real dollar short trade comes in—but not yet.

FX traders don’t live in “year-end target land.” Analysts can sit around forecasting 1.20 EUR/USD, but if you’re actually in the trenches, you know this is a market where trading the here and now is king.

With the Fed hesitant, Trump unpredictable, and tariffs throwing a wrench into every macro model, the key is staying nimble, tactical, and ready for volatility.

This isn’t a game for the faint of heart. But if you can read the tape, there’s opportunity everywhere.

My current setup is a reversion trade ( short EURUSD) but not married to the trade. And here is why.

The FX options market flashed warning signs ahead of last week’s EUR/USD upside pop, but the latest positioning suggests that bullish appetite is already cooling off. The shift is most evident in the one-month EUR/USD risk reversal, which has softened significantly.

Just last week, the EUR call premium over EUR puts spiked to +0.45%, marking the most bullish sentiment in this tenor since 2021. But in a sharp reversal, that skew has now flipped negative to -0.14% in favour of EUR puts—a clear sign that traders are reassessing upside potential.

What’s driving the shift?

 Tariff fears loom large—With early April's reciprocal trade tariffs fast approaching, markets are bracing for potential fallout, and Europe could be in the crosshairs.
 US-Europe tensions remain frosty—There’s little love lost between Washington and Brussels, and diplomatic friction is adding another layer of uncertainty to the trade outlook.
 Short-term positioning may have peaked—The recent EUR/USD rally ran hot, and with traders now dialling back exposure, a period of consolidation or downside pressure seems likely.

For now, the FX options market is sending a clear signal—the once-bullish EUR/USD momentum is fading, and with tariff risk lurking, further upside could be a tough climb.

INFLATION EXPECTATIONS

Another brutal inflation expectations printout of the University of Michigan survey, which isn’t just ugly—it’s politically loaded.

Year-ahead inflation expectations jumped to 4.9% from 4.3%, marking the third straight month of unusually large increases of 0.5 percentage points or more. That’s not just a random blip; it’s a troubling trend.

The long-run inflation expectations number is even more alarming, spiking to 3.9% in March from 3.5%—the most significant month-over-month jump since 1993. But here’s where the political angle comes in: Independents are feeling the inflation dragon nipping at their heels, who saw an outsized shift in sentiment following an already large move in February. Given the survey’s history of showing significant partisan bias—Republicans tend to report higher inflation fears under Democratic administrations, and vice versa—this shift among Independents is particularly noteworthy, as it suggests a broader, more entrenched concern about inflation, rather than just the usual political noise.

Adding another wrinkle, the survey recently switched to an online-only format, which could be amplifying volatility in the data. While this methodological change might introduce some distortions, it doesn’t change the broader takeaway: inflation expectations are getting uncomfortably sticky, and that alone is problematic for the Fed.

From a policy perspective, this is where things get tricky. Even if the actual inflation data shows signs of moderating, rising expectations can become self-fulfilling—leading to higher wage demands and, ultimately, a more stubborn inflation cycle.

If you don’t like the UMich survey, what about The February New York Fed Survey of Consumer Expectations, which also paints a grim picture:

• Medical care costs: Expected to rise 7.2%
• College tuition: Forecasted to jump 6.9%
• Rent: Expected to increase 6.7%
• Food prices: Seen rising 5.1%

These inflation expectations haven’t been this high in nearly a year.

For markets, this adds another layer of uncertainty, widening the range of plausible policy outcomes. If the Fed was looking for an easy off-ramp to rate cuts, this report just made their job a whole lot harder. And with traders already tilting toward a more hawkish Fed stance due to the inflationary unknowns around price hikes from tariffs, this kind of data only reinforces the idea that Powell & Co. may have to stay in inflation-fighting mode longer than markets would like

Goldman Sachs Research has upped its forecast for core PCE inflation, now expecting it to reaccelerate to 3% later this year—nearly half a percentage point higher than their previous estimate.

In theory, tariff hikes deliver a one-time price level jump rather than a sustained rise in inflation. But in practice, that assumption hinges on inflation expectations staying anchored—and right now, that foundation looks shakier than ever. Recent inflation-expectation surveys from the University of Michigan and the Conference Board have shown an uptick, signalling that consumers and businesses aren’t buying the “temporary” narrative.

If expectations become unanchored, the Fed’s balancing act gets even trickier. The risk? Higher-for-longer inflation, a more hesitant Fed, and a market forced to recalibrate—again.

NUTS & BOLTS

The worst of Trump’s trade policies hasn’t even landed yet, but markets and consumers are already feeling the squeeze. The S&P 500 and Nasdaq officially entered correction territory on Thursday, signalling investors are bracing for a more prolonged downturn. But if you think equities have fully priced in the damage, think again.

The S&P 500 and Nasdaq officially fell into contraction territory on Thursday. Yet, according to some S&P 500 P/E measures, like Robert Shiller’s Cyclically Adjusted P/E Ratio (CAPE ratio), there could still be some downside to going into the equity market. Generally, the higher the P/E ratio, the more expensive stocks are compared to earnings. On March 13, the CAPE ratio was at 34.47, just below the dotcom bubble peak of 44.19 and the pandemic peak of 38.58—but still above the 32.54 peak before the 1929 stock market crash that helped precipitate the Great Depression. To understand how expensive stocks still appear today, the long-run average CAPE ratio on the S&P 500, going back to 1883, is just 17.6—almost half the current level.

Financial markets aren’t just reacting to tariffs—they’re actively tightening. The Bloomberg Financial Conditions Index has flipped into tightening territory, a rare occurrence over the past 18 months. Meanwhile, $6.8 trillion in market cap has been wiped out since the February 19 peak, reversing one of the key drivers of consumer spending resilience in 2024.

With stocks sinking and bond yields still elevated, the positive wealth effect that fueled last year’s consumer strength is evaporating. As portfolio values shrink, households are scaling back spending, rethinking big-ticket purchases, and preparing for more challenging economic times.

Financial conditions are tightening fast. With $6.8 trillion in market cap wiped out since February, the positive wealth effect is reversing, pulling consumer spending down with it. The Bloomberg Financial Conditions Index has flipped into tightening mode, adding to the strain.

Consumers are bracing for impact. Inflation expectations are surging; confidence is fading, and debt stress is rising, signalling financial fragility is creeping in.

What’s next? If a trade truce materializes, markets could stabilize—but if tariffs escalate, the pain trade is far from over. With no Trump put, a cautious Fed, and risk assets wobbling, markets remain in the danger zone. Expect volatility to stay high and downside risks to dominate.

CHART OF THE WEEK

Will tariffs spark higher inflation?

President Donald Trump’s administration appears far more aggressive this time around on trade policy, signaling a willingness to take bigger risks than during his first term. According to Goldman Sachs Chief US Economist David Mericle, this escalation raises the very real prospect of larger tariff increases, which could significantly impact inflation and broader market sentiment.

Goldman Sachs now expects that the average US tariff rate will increase by at least 10 percentage points, a move that would directly fuel higher consumer prices. While tariffs are technically a one-time price level adjustment rather than a sustained inflationary force, the real concern is inflation expectations. If businesses and consumers internalize tariffs as a longer-term structural cost, this could start to alter wage-setting behavior, supply chain decisions, and overall price stability.

Mericle notes that while he initially expected trade policy to take a backseat, it’s clear that both consumers and businesses are hyper-focused on tariffs, making the inflationary risks impossible to ignore.

"It is, I think, a little bit of a surprise relative to what I might've expected several months back, just how focused businesses and consumers are on tariffs," Mericle says.

The key takeaway? While tariffs alone won't create runaway inflation, their psychological impact on the economy could be far more significant than the raw data suggests. If price pressures become self-fulfilling, the Fed may find itself stuck between a rock and a hard place—unable to aggressively cut rates while also managing slowing growth from trade disruptions.

With Trump doubling down on protectionism, markets should brace for a potentially more turbulent inflation path than many had anticipated just months ago.

The larger tariffs are also likely to weigh on economic growth, says Mericle, whose team cut its 2025 GDP growth forecast on a Q4/Q4 basis from 2.2% to 1.7%. In addition to the tax-like impact of tariffs on disposable income and consumer spending, “the uncertainty that tariffs introduced are probably going to have a larger effect, discouraging business investment [more] than I would've thought a couple of months ago,”

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