Global Market Volatility: Amplitude Modulation?

“I heard it on my radio…” ? ??????? Queen, Radio Ga Ga

Written by Neil Staines, 21st February 2025.

Last week, we discussed the recent macroevolution in the UK - weaker growth trajectory and a likely tighter fiscal stance from the March Budget (not least to pay for the PM’s new defence pledges) - and what we consider to be the two dominant global macroeconomic factors at the moment: (i) Trump Administration global (or bilateral) tariff and trade proposals and (ii) the evolution of the Russia / Ukraine conflict - progress towards a peace deal.

The Archers?

Last week, we reiterated our long-held view that the underlying strength of the UK economy is significantly weaker than the high-frequency data had suggested. Indeed, we have also argued that the fiscal expansion in the 2024 Autumn budget would likely feel like a fiscal tightening at the consumer level (not the textbook impact of a fiscal expansion). In addition to the updated projections from the BoE (showing sharply lower growth expectations, higher inflation and a higher unemployment rate, and a negative output gap throughout the forecast horizon) and the fact that the Bank projects the complete erosion of real wage growth through 2025, this week saw further data.

This week, the data in the UK has been a little more nuanced. The labour market data showed a stable unemployment rate at 4.4% (expected to tick up to 4.5%) and slightly better than expected wage growth (6.0% 3m/yoy) - However, Governor Bailey played down the wage data instead stating that the Bank see the labour market softening. Inflation in the UK also ticked higher in January (slightly more than expected, but likely a function of temporary factors - food, energy, airfares,...). Retail sales this week also came in on the hot side, and outside of the political soap opera, it will be very interesting to hear how the newly dovish MPC rhetoric adapts or explains the recent upside surprises to newly lowered growth forecasts.

The Shipping Forecast

Globally, while there is a lot of noise around the global tech and AI ‘arms race’ (and notably some recent questioning of the US extrapolated dominance in this regard), global trade continues to be a dominant factor. Last week, we discussed the concept of ‘negotiated reciprocity’ in the Trump Administration’s tariff policies and how we generally retain a more sanguine view on Trump tariff policies. While markets continue to see the likely evolution of Trump policies (tariff and the fiscal trajectory more broadly) as inflationary, we continue to see continued disinflation - Much of which likely comes from the fiscal conservatism or cost savings under DOGE (which we see as likely more significant than the market is yet willing to believe), but also from the move to bilateral or ‘negotiated reciprocity’ stance on tariffs that could ultimately result in lower global tariffs (as the Europeans have suggested could be an option for Autos this week).?

Last week, we argued that the suggestion from Trump that the ‘negotiated reciprocity’ may start from April 1st - at the end of the US investigation/report into global trade practices, further outlines the careful emphasis on addressing the perceived issues without risking an escalating tariff standoff or a deterioration into a trade war. Again, consistent with our more sanguine view of the medium-term impact of tariffs. We continue to see a more careful approach to growth, inflation and global diplomacy (despite the headline-grabbing rhetoric) than markets expect.

I'm sorry I haven’t a clue?

In the potential Russia / Ukraine war resolution, however, there is greater uncertainty. The negotiations to end the war in Ukraine are likely to be complex and bumpy. However, there appears to be motivation now on all sides to reach a relatively prompt agreement for a ceasefire - even if there are likely wide variations on what any ultimate peace deal will look like.

This is clearly a positive for global risk assets, especially if, as we would expect, the return of Russian oil and gas to the global energy supply chain is part of the negotiated peace agreement. This is a positive that would likely be felt most acutely in Eastern and continental Europe, with positive growth and inflation components and the additional boost of likely significant rebuilding contracts across the continent's construction firms. Indeed, the resultant increase in defence spending across Europe (either through Maastricht relaxation or joint borrowing) will also likely be a positive for Europe and the EUR.

Just a Minute

From a monetary policy perspective, it is likely that the US remains the dominant factor for global rates. This week, the Minutes from the FOMC’s January meeting reinforced the more patient approach from the Fed in 2025. The majority of participants favoured this more ‘careful approach to additional adjustments’, despite the vast majority of participants continuing to view the Funds Rate as still in restrictive territory - elevated uncertainty around the economic outlook, the neutral interest rate, and the economic effects of potential government policy changes remain and thus the Committee hold a desire to see further progress before lowering rates.

Perhaps the most material debate in the minutes was that “various” participants said it might be appropriate for the FOMC to “consider pausing or slowing” runoff until the debt ceiling is lifted. As recently as the January FOMC press conference, Powell pushed back against the prospect of a near-term end to this Quantitative Tightening (QT). The opening of this debate has caused markets to bring forward central expectations of an end to QT. As a removal of a significant and consistent seller of US Treasuries this process should be materially supportive for bonds and duration.?

The minutes highlight the detailed discussions around the impact of trade, tariffs, banks, and the balance sheet, as well as the fact that trade and immigration have the potential to hinder disinflation progress. Highlighting the core uncertainties for monetary policy as a function of the new administration's policies. The link to the monetary reaction function is also clouded by the discussion that the recent jump in inflation was likely a function of seasonal factors.?

The Long & Short of it…

Next week, we will have another quiet week from a data perspective, and thus, markets will once again be focused on central bank rhetoric and geopolitical developments. While there have been significant uncertainties and some setbacks to our core macro views of continued disinflation and growth moderation, recent developments suggest - to paraphrase Queen - perhaps these views are yet to have their finest hour!

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What is happening next week?

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