Volatility in markets: the impact of policy decisions on the global economy
March 18, 2025Topic of the week:
By Mario Catalá
Despite the policy decisions being made by the U.S. government, so far the macro data released continues to show that the economy continues in good health. The PMIs have maintained their positive trend, especially in the manufacturing sector (51.2), with a figure for January that is in expansionary territory for the first time since last June. Meanwhile, the services PMI continued its slowdown to 52.9, which could be an indicator that wage pressures in the services sector have corrected. GDP in the fourth quarter of 2024 grew by 2.3%, significantly below what was expected by the market (3.2%), so it would not be surprising to see notable increases in the next revisions. In any case, the year 2024 closed with growth of 2.8% (2.9% in 2023), a sign that the economy has not slowed down, but is not overheated either. A very relevant piece of information has been the Atlanta Fed’s forecast for first quarter 2025 GDP, as it puts it at -2.4%. They explain it by a sharp drop in net exports, as US companies are anticipating their purchases to minimize the impact of tariffs.
Retail sales fell by -0.9% in January, after -0.2% in December. The U.S. consumer seems to have entered a phase of spending control, especially discretionary spending, where the price of goods is being closely scrutinized and certain non-essential expenses are being postponed. Other data such as consumer confidence from The Conference Board corroborates this change in trend, and the February figure was 98.3, compared to 105.3 in January, or 112.8 in November. This indicator anticipates where household consumption is heading, i.e. it measures the level of confidence of U.S. households in the economy, and the trend is clearly not positive. Employment continues to give us very volatile information depending on the data we take (JOLTS, ADP or Non-Farm Payrolls), but once again they all show that the economy is not close to stopping, quite the contrary, it could maintain the current pace for several more quarters.
In Europe, the growth of the economy maintains a sluggish recovery tone. The PMIs have started 2025 at very similar levels to the previous year. Although the manufacturing PMI has recovered from 46.6 in January to 47.6 in February, it remains clearly in the contraction zone, demonstrating the weakness of the European industrial sector, especially in Germany. At the services level (50.6) it shows a slight deterioration, but remains in the expansion zone. Investor confidence from the ZEW Institute surprised with a greater than expected recovery (24.2 vs. 18), optimism that could be transferred to the real economy in a few months. Employment is the most disconcerting data in Europe, the economy is barely growing, but employment is not deteriorating, remaining at an all-time low of 6.2%.
An important factor that could represent a turning point in terms of the economic situation in Europe is the change that Germany is trying to make at the economic level. The current government of Friedrich Merz is trying to negotiate a new economic plan with its government partners, which would raise spending to over one trillion euros, and would also bring with it a historic move, namely to raise debt above its current limit of 0.35% of GDP (as a reference, the European Union allows public deficits to be raised to 3%). This change could translate into increased defense spending, greater investment in infrastructure and increased regional financing, which would have a positive impact on the European economy.
Macroeconomics have continued to disappoint in China in recent weeks. PMI data have barely exceeded 50 points, both at the services and manufacturing levels. The CPI was in negative territory (-0.7%) in February, once again highlighting the weakness of domestic consumption. Finally, export and import data came in at 2.3% and -8.4% respectively, well below experts’ forecasts, in a context in which the Asian country is facing potential sanctions and obstacles in terms of trade relations from the United States.
In terms of inflation, February’s CPI in the United States has brought some calm by correcting 2 tenths of a percentage point to 2.8%, since January’s figure was finally revised up to 3%. The same has happened with the Underlying data whose reading stood at 3.1% its lowest level since April 2021. In Europe, January data ratified a rebound to 2.5% for CPI and 2.7% for Underlying inflation. However, the forecasts advanced by the European Union for the month of February indicate that there will be a decrease of one tenth of a percentage point in both.
The evolution of prices may be affected in the coming months by tariffs and “counter tariffs” being imposed by different countries in response to Trump’s aggressive policies. Central banks are not oblivious to this and are starting to give very cautious messages, not wanting to set clear lines of action in the future because of what may happen. The Fed will meet this week (no movement is expected), and the ECB reduced the deposit facility rate by 25 bps in February, the second consecutive time in 2025, to leave it at 2.50%, hiding behind the macro weakness on the European continent, but warning that they cannot guarantee that they will maintain the line of cuts planned for the rest of the year.
In any case, the stable performance of the economy is not enough to convince markets that have been showing an increasingly high level of volatility for several weeks now, although there is a certain divergence in their behavior, especially in the US/Europe comparison. Several reasons are influencing this change in trend. The main one is of course Donald Trump’s style of governance, with his impulsive and intermittent decision making, raising investor uncertainty and undermining market confidence in general. On the other hand, the possible winds of change in German fiscal policy, or possible measures by China to counter Trump’s policies, are causing both markets to outperform significantly so far this year.
We will see how the different stock market indexes evolve in the coming weeks, but what is clear is that they will not be oblivious to the geopolitical decisions taken by the different governments, especially from the United States.
At Portocolom we have minimally reduced our exposure to equities in recent weeks, but we will maintain our investments, increasing regional diversification. The political changes mentioned above may have an important influence on the markets, but we prefer to wait for concrete measures to be implemented.
The beacon of the markets:
Second week of corrections in the main stock markets. Investors are analyzing the future of the new US government’s actions and the potential consequences of these actions on the real economy. The latest data on inflation reduced the pressure on prices as both the general CPI and the core version corrected 2 tenths in February to 2.8% and 3.1% respectively, in both cases the fall was 1 tenth of a percentage point more than expected. In Europe, January industrial production surprised positively by rising 0.8% in January, the market was expecting 0.5% after the -0.4% drop in December.
With the tariff battle on the agenda on a daily basis, CPI has taken a back seat to the concerns of managers, who are now closely awaiting signals from macroeconomic data on the health of the economy’s growth, after the first signs of a perceived slowdown. Indeed, data on employment, household and corporate indebtedness, wage growth, corporate earnings growth, etc., remain very solid, but could be compromised by policy decisions.
Equity markets dyed the major indices in the red. In the United States, the S&P 500 lost 2.27% and the Nasdaq 100 2.45%, to close at 5,638.94 and 19,704.64 points. Meanwhile, in Europe, the Euro Stoxx 50 fell by 0.98% and the Ibex 35 by 2.04%, to 5,411.25 and 12,987.20 points. It is noteworthy that in the last two sessions there was a rebound of close to 2.5% on average, in all of them from the annual lows, which could be a sign that a potential short-term floor is near, after the significant corrections accumulated since the February highs.
In fixed income, changes were minimal with slight rallies in long-term government bond yields. The Treasury gained 2 bps to end the week with a yield of 4.32% while the 10-year Bund gained 3 bps to 2.87% and the Bond barely gained 1 bps to close at 3.50%. Markets seem to be digesting the major investment decisions proposed in Europe in infrastructure and defense.
Uncertainty is still present, and the most conclusive proof of this is that gold, the safe-haven asset par excellence, surpassed the 3,000 USD/Onz mark for the first time in history, closing Friday at 3,001.10 after touching 3,017.10 USD/Onz, a new all-time high. For its part, Brent was virtually unchanged at the close, but prices had a weekly range of 4%, closing at 70.58 USD/b representing a rise of 0.30%.
The most important reference for the current week is the Fed’s monetary policy meeting, for which no changes are expected, i.e. the reference rate will remain at 4.50%. Possible subsequent comments from Fed members, such as the macro projections that they will update after the meeting, will be the data that will be analyzed in greater detail in search of clues as to the Fed’s next moves. The other macro reference in the United States was yesterday, Monday, with a retail sales figure of +0.2%, lower than expected (+0.6%), and additionally revised downwards the previous month’s figure, with a drop to -1.2%.
In Europe, highlights include the CPI update, 2.4% estimated, and the ZEW investor confidence index, expected to jump sharply to 43.6 from 24.2 previously. The ECB will also update some of its forecasts with the presentation of its Economic Bulletin. In China on Monday, industrial production data was released, which grew by an annualized 5.9% in the month of February, better than expected, and the unemployment rate rose to 5.4% from 5.1% previously.
The sentence:
And we sign off with the following quote Robert Schuller, American pastor, motivational speaker and author, “Let your hopes, not your sorrows, shape your future.”
Summary of main financial assets performance (3/17/2025)
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