Stagflation Concerns Deepen as Investors Brace for 2nd April Tariff Announcement

The U.S. president is often seen as a polarizing figure, few remain indifferent to his leadership style. However, despite his many detractors, one aspect of his presidency has remained remarkably consistent: his ability to keep markets on edge. Since taking office, President Trump has repeatedly forced economic agents worldwide to second-guess their decisions, reacting to his unpredictable announcements. His statements have influenced diplomatic relations, business strategies, and consumer behaviour—one social media post at a time. Among the flurry of recent announcements, market participants were particularly focused on April 2nd, the date set for the unveiling of a fresh round of tariffs. What kept investors on edge was the lack of clarity—who would be targeted, and would the tariffs apply to specific products or be implemented broadly? The latter scenario posed the greatest economic risk. In an unusual move, the president pre-emptively announced a 25% tariff on cars and car parts imported into the U.S. The stated objective was to boost domestic manufacturing by incentivizing private-sector investment. However, industry leaders, including Ford’s CEO, warned that the policy could drive up costs and weaken sales. If implemented aggressively, these tariffs could have unintended consequences, such as a crowding-out effect—raising barriers to entry that might force smaller players out of the market, ultimately undermining the intended economic benefits. Among U.S. trading partners, Mexico and Canada are key suppliers of automobiles and auto parts, while in Europe, Germany is expected to bear the brunt of the impact. Investor concerns over the tariffs were reflected in market movements: the SXAP, which tracks European automakers, declined 4.37% between Wednesday’s close and Friday, led by Mercedes (-5.91%) and BMW (-6.15%). U.S. automakers fared even worse, with the DJUSAU—tracking the performance of American automakers—falling 8.4% over the same period. General Motors plunged 11.24%, Tesla dropped 8.53%, and Ford declined 5.54%.

As mentioned earlier, President Trump has forcefully influenced the behaviour of world leaders, businesses, and consumers. The key factor here is the forced nature of this change—few welcome being pushed out of the comfort of predictability to navigate what often appears to be the mood swings of a single individual. At its core, economics revolves around agents—their behaviour and interactions shape economic outcomes. In this context, harsh and uncompromising measures, such as the U.S. tariffs, have the power to alter behaviour, but not necessarily in a positive way. Beyond their direct economic impact, these policies have also fuelled a growing wave of anti-American sentiment, which is something to watch in the coming months. Signs of this backlash first emerged in Canada in March and have now spread to Europe. A quick glance at Google search trends reveals that interest in Anti-Americanism recently reached its highest level since 2017—another period marked by Trump’s policies. In response to what they perceive as worsening business conditions and rising costs of living under his administration, economic agents are finding new ways to retaliate. In Canada, this sentiment has translated into concrete actions. For example, the province of Ontario has moved to exclude U.S. companies from government contracts. Meanwhile, Canadian consumers are cancelling trips to the U.S. and reducing their purchases of American-made alcohol. Some liquor stores have even removed U.S. brands from their shelves. In Europe, similar trends are emerging. Consumer groups on social media are actively encouraging boycotts of American products in favour of European alternatives.

U.S. consumers, on the other hand, are beginning to feel the full impact of Trump’s presidency and are growing increasingly uncertain about the country’s economic outlook. This sentiment was reflected in the latest release of the University of Michigan’s Consumer Confidence Index, which showed that concerns over inflation and job prospects have reached their lowest level since 2022. This growing pessimism has intensified over the past month amid rising price pressures. The latest Core PCE reading—the Federal Reserve’s preferred inflation gauge—came in at 2.8% for February, exceeding economists’ expectations of 2.7%. This has reinforced fears that inflationary pressures may be more persistent than initially anticipated. The trend follows hotter-than-expected manufacturing price data earlier in March, as indicated by the ISM Manufacturing Prices Index. These inflationary concerns appear to be weighing on consumer spending. The latest retail sales report showed a modest 0.2% growth in February, falling short of market expectations. Certain categories, such as electronics and appliances, saw notable declines. When households start to feel financial strain, they tend to cut back on durable goods and other big-ticket purchases—a trend that could further dampen economic momentum in the months ahead.

Consumers remain the backbone of the US economy, therefore when they start changing their behaviour, this could potentially cascade down on economic activity. The idea of having slower economic growth has already gained traction in the past weeks. The latest summary of economic projections from the FED showed that FED governors were now expecting real GDP to reach 1.7% in 2025, down from their initial expectations of 2.1% in December. What is further cause for concern is the upward revision in in Core PCE, from 2.5% to 2.8%, reflecting concern over price pressures, along with an upward revision in unemployment rate from 4.3% to 4.4% in 2025, showing this time concerns over the job market. The combination of stagnant economic growth, rising inflation and unemployment further reinforces the stagflation narrative we mentioned a month ago. However, in strict economic sense, although stagflation is the result of external shocks, the magnitude of this shock is the key determinant in whether or not a stagflation scenario will unfold. It is still unclear at this stage if the unfolding trade war will be sufficient in terms of magnitude to result in a case of Stagflation. This is precisely why the 2nd of April will be a key date for market participants, since Trump labelled it as “The big one”. Theses remarks added concerns regarding the economic outlook and led the US 10yr Treasury to rally causing its yield to drop by 11.4 bps drop on Friday. As a result, TLT was up 2.4% on Friday. On the other hand, investors pulled out from equities as the S&P 500 fell 1.53% w/w, bringing the broad index close to correction territory having fallen close to 10% from its recent high. Similarly, the Nasdaq fell 2.59% w/w, while the Dow Jones fell 0.96% w/w.

On the equity front, the SEMDEX ended a six-session win streak on Monday after the broad market index took cues from foreign indices. Overall, the index gained 1.28% over the week. Heavyweights tracked the broader market closely, as the SEM-10 gained 1.20%. The index was supported by the trading activity around earnings publication in the past week. Market participants were mainly focused on SBMH (+3.59%) as the board of the holding announced an increase in its payout ratio from 24% to 30%, resulting in a DPS of Rs 0.50. Dividend yield on the stock subsequently rose to 8.56% at the time of publication. Similarly, banking peer MCBG followed the same trend and closed higher to reach Rs 474.50 (+2.04%). Overall total market turnover (TMT) reached Rs 496.7m in the past week, up from 239.8m in the past week due to one off trades on the debt board. Excluding these trades, total market turnover was actually down to Rs 102.7m, partly due to the lower number of sessions this week. Normalized turnover was geared towards MCBG, who made up 46.3% of TMT. Foreigners were net sellers to the tune of Rs 4.4m (OM+DEM) with CIEL being the main driver of foreign outflow (-1.8m). Similarly, foreigners were net sellers on MCBG to the tune of Rs 1.1m. Among individual names, sugar conglomerates featured among this week’s top gainers. Terra gained 6.54% to Rs 22.00, while Alteo gained 4.87% to reach Rs 14.00. On the construction front, Gamma gained 4.33% to Rs 34.90. Similarly, UBP inched up 0.30% to Rs 83.00. Among hotels. NMHL gained 4.55% to reach Rs 13.90. Similarly, LUX gained 1.03% to Rs 49.00. Contrastingly, SUN fell 5.85% to Rs 37.00.