Market Relief as Trump Pauses Tariffs, but Uncertainty Lingers

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

One of the most volatile weeks in recent memory ended with stocks posting gains for the full week, while yields on Treasurys rose (yields and bond prices move inversely to each other). The gains for the week came after President Trump announced a pause on most of the reciprocal tariffs he had unveiled on April 2. While last week’s rally helped undo some of the sell-off that occurred in the days immediately following the announcement of the levies, the major indices remain underwater month to date.

In recent weeks we’ve discussed the hope held by investors that eventually President Trump would back away from implementing tariffs (a so-called “Trump put”) or the Fed would preemptively cut rates to boost the economy and take selling pressure off the markets. We believed neither were likely to happen in the near term and, despite the pause on tariffs, aren’t yet convinced that we have seen the last of the administration’s efforts to remake the global economy and the role of the U.S. Indeed, while the president pressed pause on most of the reciprocal duties, he left intact a 10 percent across-the-board tariff on almost all foreign goods entering the U.S. and ramped up duties on most goods from China to 145 percent. The already enacted 10 percent across-the-board levies are in addition to industry-specific tariffs on automobiles, steel and aluminum as well as items that are not covered by the United States-Mexico-Canda agreement. The administration announced over the weekend that they exempted certain electronics from the reciprocal tariffs; they later noted that these are only temporary reprieves with a different tariff applied to the sector in the coming months. While the latest exemption may affect the final math, we note that last week’s changes had only a modest impact on average tariff rates. reducing the average levy a few points to the low to mid-20 percent range.

While it is likely the administration will negotiate with countries on an individual basis and continue to fine-tune its trade policies over the next 90 days, we believe the president is unlikely to fully abandon taxing imports. Trump has a long history of advocating for a narrowing of the trade deficit and has been a proponent of using tariffs to achieve his goals. Additionally, the president believes the U.S. military acts as stabilizing force globally but results in additional costs for the U.S. In making the case for Trump’s approach, Stephen Miran, the chair of the Council of Economic Advisers, noted in comments last week, “If other nations want to benefit from the U.S. geopolitical and financial umbrella, then they need to pull their weight and pay their fair share.”

We note that last week’s pause likely occurred not only because of the sell-off in equity markets but more so because of a spike in intermediate- to longer-term Treasury yields. This rise saw yields for 10-year Treasurys rising from 3.99 percent to end the week at 4.49 percent. Speculation about reasons for the jump in yields range from an unwind of the basis trade (used by hedge funds when trading government securities) to forced liquidations to foreign selling to even investors potentially considering what would happen to the deficit in the event of a possible recession.

While we believe it is likely a combination of all the above, we return to comments made by Miran at a speech at the Hudson Institute:

“First, the United States provides a security umbrella, which has created the greatest era of peace mankind has ever known. Second, the U.S. provides the dollar and Treasury securities, reserve assets [that] make possible the global trading and financial system [that] has supported the greatest era of prosperity mankind has ever known. Both of these are costly to us to provide.

“In my view, to continue providing these twin global public goods, there needs to be improved burden sharing at the global level. If other nations want to benefit from the U.S. geopolitical and financial umbrella, then they need to pull their weight and pay their fair share. The costs cannot be solely borne by everyday Americans who have already given so much.

“The best outcome is one in which America continues to create global peace and prosperity and remains the reserve provider, and other countries not only participate in reaping the benefits, but they also participate in bearing the costs. By improving burden sharing, we can enhance resilience and preserve the global security and trading systems for many decades into the future.”

We believe these comments and the implication that the U.S. may adjust its role in the global economy helps explain the rise in Treasury yields and decline in the dollar as the U.S. pulls back in its historical role in global defense and economics. In our view they also show that this is about more than just tariff rates, and it underscores how hard it will likely be to reach a new equilibrium.

We note the administration’s views on trade not to weigh in on whether they are good or bad but to explain why we believe last week’s suspension of some of the tariffs may not mark the end of uncertainty about trade policy. As such, the Trump put may be a temporary measure that simply delays the impact of higher levies on the economy and markets.

Likewise, while last week’s Consumer Price Index report offered encouraging news about the pace of inflation, we don’t believe it materially moved the needle for the Fed and its current wait-and-see approach to interest rates. Despite the decline in headline inflation, the latest results from the University of Michigan Consumer Sentiment survey show that inflation expectations continue to climb and are having a spillover effect on views about the economy and personal finances. Given that the Fed has been vocal about not wanting inflation to become embedded in the economy and affect consumer behavior, we believe it will be unwilling to cut rates until it has a clearer view of how trade policy will play out and can gauge its impact in hard data.

Simply put, while last week’s tariff reprieve offered some relief from selling pressures, we believe uncertainty and volatility will persist in the near term. As such, when we’re asked whether we think it is a good time to buy or sell, we counter with our view that it is a good time to diversify. As we discuss in our latest Quarterly Market Commentary, over the past 25 years there have been various asset classes that have taken their turns as performance leaders during economic cycles. The reality is that no one can time those shifts. Rather than trying to shift concentration between various markets over time, we believe a much better strategy is that of diversification.

Wall Street wrap

Consumer confidence retreats as inflation concerns heat up: Consumer sentiment fell 6.2 points this month to 50.8, down 23.2 points from the post-election high recorded in December, according to the latest consumer sentiment survey released by the University of Michigan. With the exception of June 2022, this marks the lowest level recorded in the survey’s history going back to 1978. Views of current economic conditions fell 7.3 points, and expectations for the future also softened. Generally, consumers highlighted uncertainty around policy and economic matters.

Once again, the decline in sentiment cut across age, income, geographic and political affiliation. While the survey was completed before the Trump administration paused reciprocal tariffs on most countries, details highlight rising risks for the potential of a recession in the future. Respondents took a dimmer view of prospects on everything from business conditions to personal finances, income and the labor market. The percentage of consumers anticipating an increase in unemployment going forward rose for the fifth consecutive month to its lowest level since 2009. Perhaps most surprising was the jump in inflation expectations.

Year-ahead inflation expectations rose to 6.7 percent from last month’s final reading of 5 percent. This is the highest level since 1981. It also marks the fifth straight month of outsized increases of 0.5 percent or more. Most importantly, long-run expectations for prices also rose, coming in at 4.4 percent, up from February’s final reading of 4 percent. Long-term expectations are a focus for the Fed, as they can indicate when concerns about inflation are becoming embedded in the views of consumers and businesses.

While final survey results may change as interviews following Trump’s partial reversal on tariffs are added to the tally, the trend of sharp increases in inflation expectations along with growing concerns about the economy and personal finances could translate to a further slowdown in consumer spending, which would put further pressure on economic growth.

Consumer borrowing declines: Consumer borrowing pulled back in February, with outstanding balances dropping by $810 million according to the latest data from the Federal Reserve. This marks the first decline since November 2024. For context, Wall Street estimates were for a $15 billion increase in consumer borrowing. Additionally, January’s estimate of borrowing was revised down to $8.9 billion. The pullback in borrowing may suggest that consumers are growing increasingly cautious given current economic uncertainty and are pulling back on spending.

Inflation slowed more than expected: The latest Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS) showed that prices declined 0.1 percent in March, down 0.3 percent from the prior reading and below Wall Street estimates. On a year-over-year basis, the headline figure was up 2.4 percent, marking the lowest level since September 2024. Core inflation, which excludes volatile food and energy costs and is the measure that the Federal Reserve focuses on, rose 0.1 percent in March, down from 0.2 percent recorded in February. Over the past 12 months, core CPI is now up 2.8 percent on a year-over-year basis. The data came after a string of readings that showed core readings stubbornly elevated. Despite the latest improvement, longer-term trends suggest the Fed is likely to hold out for a string of lower readings before cutting rates. Over the past three- and six-month periods core CPI was 3 percent, still above the Fed’s 2 percent target.

Goods prices declined 0.1 percent for the month, breaking a recent trend of rising prices for manufactured goods. On a year-over-year basis, goods prices are essentially flat. Services prices rose 0.1 percent in March, down from a 0.3 percent increase last month. They are now up 3.7 percent on a year-over-year basis, unchanged from February’s year-over-year pace.

Because services readings include the lagging housing category, we typically look at services inflation excluding shelter to get a clearer picture of current measures of price pressures. Services prices excluding shelter were down 0.07 percent for the month. So-called “super core” prices also fell in March, declining 0.24 percent. On a year-over-year basis, super core prices are up 2.86 percent. On a three- and six-month annualized basis, super core prices are up 3 percent.

Inflation measures by some of the regional Federal Reserve banks, designed to gauge overall trends of inflation, show an uptick in prices. The Cleveland Federal Reserve’s calculation, called the Cleveland Median CPI, came in at 0.34 percent in March, up from 0.28 in February. On a three- and six-month annualized basis, the measure is up 3.9 percent and 3.6 percent, respectively. The year-over-year reading comes in at 3.5 percent. While the latest inflation readings are generally encouraging, we don’t believe this month is reflective of tariffs and needs to be taken in the context of the prior few months due to the reality that companies and consumers likely bought ahead of expected tariffs, which has impacted inflation. Additionally, the drop in the BLS’s CPI measure could suggest a drop in demand as concerned consumers put off purchases in response to recession fears.

Small business optimism declines: The latest data from the National Federation of Independent Businesses shows that optimism among small businesses fell 3.3 points in March, to a level of 97.4. The latest reading marks the first time in five months that optimism was below the 51-year average of 98. The step back in optimism was widespread, with seven of the 10 components measured showing decreases, two showing an increase and one unchanged. Meanwhile, the Uncertainty Index declined to 96, falling 8 points but still elevated compared to historical norms.

A closer look at the report shows that heightened expectations following the presidential election have mostly evaporated. The net percentage of respondents who expect the economy to improve fell 16 points in March to 21, down from 37 percent the prior month and less than half the post-election high of 52 percent.

Sales for small businesses have been in decline since June 2022, including the latest reading showing a still historically depressed 11 percent more businesses (one point better than in February) reporting declining sales than reporting flat or rising purchases. Against these still poor sales levels, selling prices pulled back, albeit still at historically elevated levels, with 26 percent of respondents noting higher selling prices compared to 32 percent in February. Costs for businesses continued to rise, with 38 percent of respondents reporting they raised compensation in the prior three months. This figure is up from 33 percent in February.

Wage growth and slow sales have translated to generally slow earnings for small businesses since COVID. The latest reading shows a net 28 percent of business owners have seen their earnings shrink over the past three months, four points worse than February’s reading. Among owners reporting lower profits, 35 percent blamed weaker sales, 18 percent cited usual seasonal change, 11 percent cited the rise in the cost of materials, and 8 percent cited labor costs. All of this led companies to pull back on hiring.

The portion of businesses expecting to hire in the next three months declined in March. The latest results show 12 percent of companies expect to add to payrolls, a decrease of 3 points from February. Those who are hiring continue to struggle finding qualified help, with 47 percent of those hiring reporting a lack of qualified candidates. As we’ve noted in the past, a scarcity of qualified workers can lead to a rise in wages. To that end, 38 percent of businesses reported raising compensation in the past three months, an increase of five points from the prior month. The latest survey results show the portion of businesses expecting to raise wages in the next three months rose one point to 19 percent.

The week ahead

Wednesday: The U.S. Census Bureau will release the latest numbers on retail sales for March before the opening bell. Last month’s report showed anemic growth in sales, and we will be watching to see if consumers have continued to pull back on spending.

The Homebuilders Index from the National Association of Home Builders will be out in the morning. Confidence among builders fell last month due to concerns about tariffs and building costs. We’ll be watching to see if builders’ optimism has eroded further as mortgage rates have risen in recent weeks.

Thursday: We’ll get March housing starts and building permits from the U.S. Census Bureau. This data, along with the Homebuilders Index released on Wednesday, will provide insight into the home construction market.

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