Tariff Turbulence Tests the Path to an Economic Soft Landing

Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.

Eurozone Market Update

EU exports to the US were hit with 20% tariffs from 2 April, including 25% on the auto sector, steel and aluminium, darkening the euro area outlook despite a 90-day negotiation window. In response to weakening growth and elevated uncertainty, the ECB unanimously cut rates by 25 bps. The Governing Council struck a more cautious tone, dropping previous references to policy becoming “meaningfully less restrictive” and emphasising optionality. President Lagarde noted the outlook is not “shock-free,” with tariff spillovers posing two-way risks. Markets have now priced in 60bps of further cuts this year, equivalent to two additional moves. April’s composite PMI fell to 50.1 (see Chart of the Month). Encouragingly, manufacturing output PMI improved to 51.2, the highest since May 2022. However, consumer confidence deteriorated, with the GfK index at -16.7 and Germany’s ZEW sentiment plunging to -14.0 in April from 51.6 in March.

_{Source: Bloomberg, data as of 30 April 2025}

UK Market Update

The US imposed a 10% tariff on UK goods from 2 April. While this was lower than tariffs applied to most other countries, broader sentiment effects may weigh on confidence and demand. March CPI headline annual inflation eased to 2.6%, with the core at 3.4% and services inflation at 4.7%, all slightly below expectations. While a slowing of inflation supports a May rate cut, underlying pressures may reaccelerate in April due to the National Insurance tax increase. April’s flash composite PMI fell to 48.2, indicating contraction across services and manufacturing. Public finances remain strained, with annual borrowing hitting £151.9bn, above the OBR’s £137.3bn forecast. March alone saw £16.4bn in borrowing. Consumer sentiment worsened, with the GfK index dropping to -23 amid tax hikes and economic concerns. This weakening confidence compounds the growth challenges facing the UK economy.

_{Source: Bloomberg, data as of 30 April 2025}

US Market Update

The US announced sweeping tariff changes on 2 April, including a 10% baseline tariff on all imports and 25% duties on autos, steel and aluminium. Reciprocal tariffs on 90 countries were due on 9 April but were paused for 90 days, with rates lowered to 10% for all but China, which faces 145%. The delay followed interest from over 75 countries in renegotiating terms. While the University of Michigan sentiment survey fell to 52.2, fuelled by fears of the economic fallout of tariffs, hard data around employment and inflation remains resilient. March non-farm payrolls rose by 228,000, while average hourly earnings rose in line with expectations at 0.3%. Headline CPI inflation declined 0.1% monthly and eased to 2.4% annually. Core CPI rose 0.1% monthly and 2.8% annually.

_{Source: Bloomberg, data as of 30 April 2025}

Looking Ahead

As we enter May, monetary policy divergence is becoming more pronounced between central banks. The ECB and BoE remain focused on soft economic data, prioritising growth support as inflation eases. A June rate cut is increasingly likely for the ECB, supported by weak PMI data. This June meeting is pivotal, with updated staff projections set to clarify the disinflation outlook and fiscal assumptions. Meanwhile, the BoE is also leaning more dovish, but UK services resilience and a still-tight labour market suggest a slower pivot, with a quarterly cutting pace still our base case. In contrast, the Fed faces a more complex challenge. While growth in the US remains robust, inflation expectations are uncertain. The potential for renewed tariffs, particularly on Chinese imports, adds another risk to the inflation outlook. Markets are beginning to question the likelihood of any meaningful Fed easing in 2025. Money markets are likely to remain volatile in the near term as participants weigh divergent macro signals and central bank rhetoric. Rate expectations, particularly in the US, are becoming increasingly sensitive to each incremental data release, keeping the front end firmly in focus.

Chart of the Month

_{Source: Bloomberg as of 30 April 2025}

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