It’s ‘Show Me’ Time

Seventy days into the new U.S. administration, we are beginning to accrue enough hard data to correct or confirm the pessimism of recent soft data.

It is not the end, or even the beginning of the end, said Winston Churchill in 1942, when things finally started looking up for the Allies in the Second World War. But it is perhaps the end of the beginning.

Seventy days in, there is an “end of the beginning” feel to President Trump’s new term. This Wednesday will see major announcements on tariffs that should provide some clarity on the growth outlook and potentially herald a more predictable framework for policymaking. Markets have already begun to trade less on the rhetoric, waiting instead for more concrete measures. And hard data is approaching a critical mass that will either confirm or correct the pessimism evident in recent consumer and business surveys.

It's approaching “show me” time for investors.

More Predictability

According to the White House, April 2 will see the U.S. impose reciprocal tariffs that match the foreign import taxes of all its trading partners.

It is not clear how punitive these will turn out to be. Last week’s news flow suggested they would be narrower and less onerous than had been feared, and President Trump himself indicated they would be “very lenient.” On the other hand, the European Union’s trade commissioner reportedly expects something “in the realm of 20%” for European goods, which doesn’t sound lenient.

There are many other things to clear up, too. Will the proposed 25% tariff on Canadian and Mexican goods finally go ahead on Wednesday? Last week saw the announcement of an additional 25% tariff on auto imports, which unleashed a wave of potentially damaging tough talk and introduced yet another new deadline of May 3. Reports say that tariffs on copper may be imposed well before the Department of Commerce rules on their national security implications. Proposed charges on Canadian dairy products, European alcoholic drinks, a range of other goods like drugs and microchips, and anything from countries that buy Venezuelan oil all remain up in the air.

For investors, the ultimate tariff levels are arguably less important than the greater certainty that tomorrow’s announcements should bring. If that stretches to a clearer framework around trade policy than has been evident in the U.S. president’s approach to trade with Canada and Mexico, the additional predictability will be especially valuable to investors and business leaders.

The market appears to anticipate more predictability, and it has already grown inured to existing uncertainty. For all its size and potential economic impact, the auto-tariffs announcement was not particularly market-moving, for example. Since mid-March the VIX Index of implied equity market volatility has eased back from a spike of 28 to below 20, and the equivalent MOVE Index for bonds has also dropped meaningfully.

Hard Data Versus Soft Data

If anticipation of more policymaking predictability is one reason for the decline in volatility, the gradual accumulation of hard data from the real economy is another.

Since mid-February, investors have been pricing for a hit to U.S. economic growth. U.S. equities have declined by around 10%. The U.S. 10-year yield is down by some 30 basis points. U.S. high yield credit spreads are 50 basis points wider. More recently, as a change to Germany’s fiscal stance was confirmed, they have also priced for an economic revival in Europe.

Both moves are based on assumptions. The first is that higher tariffs, deep government spending cuts and general policy uncertainty would stifle U.S. business and reduce demand. The second is that Europe’s fiscal spending plans will be realized and that its multiplier effects will be large and lasting.

So far, these assumptions rest mostly on the soft data from surveys and economic model outputs.

One infamous example is the near 3% drop in first-quarter U.S. output projected by the Atlanta Fed’s GDPNow model: Its distortions are well understood, but it still spooked investors. Others include surveys of U.S. consumer sentiment: The widely followed University of Michigan and Conference Board indices have slumped to levels last seen when inflation was raging, and the Covid-19 pandemic was still a threat.

Two months in, we are accruing enough hard data to begin to assess the actual impact of the new U.S. administration on economic activity. Citi’s indices tracking changes and surprises in U.S. economic data already show growing strength in hard data through February and March, even as the soft data weakened. A good example was February’s U.S. retail sales holding up better than the consumer confidence surveys would have suggested. But a counter example arrived in Friday’s U.S. Personal Income and Spending data, which suggest a slight reluctance to spend—especially on food services and accommodation—despite strongly rising incomes.

This week alone we will get the Institute for Supply Management’s Purchasing Managers’ Indices (PMIs) and U.S. jobs data for March. If they confirm the strong readings from last week’s S&P Global PMIs and February’s relatively solid payrolls, the growth-scare trade could unwind further. First-quarter corporate earnings season, which gets underway at the end of next week, will give us even more hard data from the factory floor.

Waiting Game

Again, the fact that this kind of news is real and bankable is arguably more important than whether it is good or bad—especially with regard to this week’s tariff announcements.

With that in mind, it is worth remembering that this shift from soft to hard data for confirmation of current investment trends will happen much sooner in the U.S. than it will for Europe. That may have important implications for relative performance, as the U.S. outlook solidifies. U.S. business leaders will have more of the clarity needed to make capex decisions. Investors should have more confidence on whether to price for zero rate cuts from the Federal Reserve this year, or four, or something in between.

For the U.S., after this week, the waiting game will be closer to being over. It will be the end of the beginning.