One of The Fed's Top Recession Alarms Sends 2008-Style Signal

Economic

Forex

Summary:

LONDON (April 4): One of the Federal Reserve's preferred recession indicators has this week deteriorated as fast as it did in 20

LONDON (April 4): One of the Federal Reserve's preferred recession indicators has this week deteriorated as fast as it did in 2008, the latest sign that bond investors are bracing for a sharp economic slowdown as a result of US President Donald Trump's sweeping tariffs.

There are many metrics economists and investors use to try to predict a downturn. The gap between two-year and 10-year Treasury yields for instance, is a bond market favourite.

Fed Chair Jerome Powell is said to favour the difference between the yield on three-month Treasury bills and their expected yield in 18 months.

The rationale is that this spread best reflects very near-term rate expectations in a way the gap between two-year and 10-year Treasuries does not.

When recession is looming, the spread narrows and turns negative. However, the Fed's rate-hiking cycle that started in March 2022 flipped this spread into negative territory and kept it there as yields on T-bills were still high.

On Friday, this spread was at minus 113 basis points, its most negative since last October, but crucially, set for its biggest one-day increase since late 2008, when the global financial crisis roiled markets.

"It's usually 3-18 months after the last Fed hike until the start of the recession ... we are at 21 months and counting so far — no more soft landing folks?" Jordan Rochester head of fixed income, currencies and commodities strategy for EMEA at Mizuho, said in a note on Friday.

Investment bank JPMorgan on Friday said the risk of a US and global recession this year has risen to 60% from 40% based on Trump's reciprocal tariffs.

Just last week, US rate futures suggested traders were assuming the Fed would cut rates by another 65 basis points this year and then hit the pause button.

They now price in 100 bps of cuts by December, and another 25 bps over the first quarter of 2026, which, if it materialised, would bring US rates to a range of 2.75-3.35%, roughly where they were 2½ years ago.

Banking stocks, which tend to perform well when interest rates are rising, fell sharply around the world on Friday, as recession fears and expectations for deeper rate cuts took hold.

Derivative markets for other central banks painted a similar picture, with the European Central Bank and the Bank of England expected to chop rates three more times this year, from around twice previously.

Zurich Insurance Group chief market strategist Guy Miller said many investors had thought Trump would use tariffs as a negotiating tool and then scale back his threats, but that clearly was not the case.

"These are fairly brutal and clunky weapons that are trying to change the shape of trade but are likely to backfire," he said.

"It is going to lead to inflation and squeeze real incomes in the US. So it creates a vicious circle and a dangerous one."

Source: Theedgemarkets

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Warren Takunda

Economic

Japanese stocks sank on Friday to their lowest since last August, marking their sharpest weekly drop in five years, as fears of a global recession in the wake of U.S. President Donald Trump's sweeping tariffs gripped markets.

The Nikkei average closed down 2.75%, registering a 9% drop for the week, its steepest weekly decline since March 2020. The index also hit its lowest since early August during the session.

The index is down 20% from its peak in July, meaning it is in bear market territory per some market definitions.

The brutal selloff came after Trump announced on Wednesday Washington's steepest trade barriers in more than 100 years, sending investors scrambling for safe-haven assets, including the yen , which added further pressure on Japanese stocks.

The rout was led by banking stocks as the spectre of tariffs and their potential impact on economic growth stoked speculation that the Bank of Japan may need to delay rising interest rates.

The banking index fell over 8% on Friday, recording a 20% decline for the week, its worst weekly performance on record, according to LSEG data.

The broader Topix closed down 3.3% and clocked a 10% drop for the week, its biggest weekly decline since March 2020.

Japanese bank shares recently gained popularity among investors betting on rising BOJ rates.

All but three of the Tokyo Stock Exchange's 33 industry sub-indexes dropped on Friday, with the banking index down 11%, making it the worst performer and triggering a circuit breaker.

The banking index was on track for a decline of more than 20% this week, its worst weekly performance on record. Shares of Mitsubishi UFJ Financial Group, one of Japan's biggest banking groups, fell 11.6%, their sharpest one-day drop since August 5.

Wall Street's main indexes suffered their biggest one-day percentage losses since 2020 on Thursday, the day after President Donald Trump's Liberation Day.

"There was quite a bit of froth in this market going into this Trump tariff announcement," said Kei Okamura, a portfolio manager at Neuberger Berman in Tokyo.

Banks had been doing well, and it appeared hedge funds had big exposure to the sector, hence the volatility, he said.

"The Trump tariff announcement is obviously creating uncertainties about the outlook for the currency because of what's happening in terms of the discussions within the BOJ."

"With that uncertainty about the potential for how many more rate hikes we can see this year, that's why we're seeing this reversal not just for JGB yields, but also in terms of the (banking) sector," Okamura said.

BOJ Governor Kazuo Ueda said the central bank would scrutinise the impact of U.S. tariffs on the country's economy when setting monetary policy, warning the higher levies will likely weigh on global and domestic economic growth.

Wall Street benchmarks slumped on Thursday, ending with the largest single-day losses in years. S&P 500 companies lost a combined $2.4 trillion in stock market value.

Takamasa Ikeda, a senior portfolio manager at GCI Asset Management, said the Nikkei has "double headwind – the tariff and the stronger yen" and could fall to as low as 32,000 this month.

Source: Reuters

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Commodity

Crude oil futures slumped to near multi-year lows after the Organisation of the Petroleum Exporting Countries (OPEC) and its allies announced a larger-than-expected production increase on Thursday, compounding the Trump tariff-driven sell-off in energy markets. The decline erased all the geopolitical risk-driven gains since the US struck Houthi militants in mid-March.

Brent futures fell 6.42% to $70.14 per barrel, while West Texas Intermediate (WTI) declined 6.64% to $66.95 per barrel on Thursday. Both benchmark prices extended losses during Friday’s Asian session, nearing their lowest levels since December 2021.

OPEC’s decision followed US President Donald Trump’s “Liberation Day” announcement of reciprocal tariffs, which rattled financial markets. Investors feared the measures could spark an all-out global trade war, tipping the world economy into recession. Growth-sensitive commodities, including copper and crude oil, were already under pressure, with oil prices falling by 4% after the announcement. The decision by eight OPEC members to raise output exacerbated the fragile sentiment, driving crude prices lower. Notably, the White House confirmed that oil, gas, and refined products were exempt from the new tariffs.

OPEC to hike production

Eight key members of the OPEC group, including Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria, and Oman, agreed to increase their joint oil output by 411,000 barrels per day in May, speeding up their unwinding of the production cuts. “This comprises the increment originally planned for May in addition to two monthly increments,” stated OPEC’s official website.

The increase is well above the market estimated 140,000 barrels per day next month. In April, the oil producer cartel is already set to increase output by 135,000 barrels per day after months of delay in easing its voluntary oil production cuts of 2.2 million barrels per day. Market participants expected the organization to maintain a similar volume of production hikes in May.

“The gradual increases may be paused or reversed subject to evolving market conditions. This flexibility will allow the group to continue to support oil market stability,” the organisation added. “The eight OPEC+ countries also noted that this measure will provide an opportunity for the participating countries to accelerate their compensation.” Some members are required to reduce supplies to compensate for overproduction compared to their output targets, totalling 4.2 million barrels per day. Kazakhstan, the United Arab Emirates, Nigeria, and Gabon have been identified s countries exceeding their output targets in recent months.

The eight cartel members will meet on 5 May to decide on June production levels.

Geopolitical tensions remain a bullish factor

However, Trump’s tariff threats against key OPEC+ members, including Russia, Iran, and Venezuela, may reduce their supplies, potentially offsetting the planned output increases.

Trump imposed 25% tariffs on countries importing Venezuelan oil, effective this week. Last week, he also threatened to impose tariffs of 25% to 50% on Russia’s oil buyers and warned of “bombing” and the implementation of “secondary tariffs” on Iran. These “secondary tariffs” represent a new form of sanction through import levies, with China and India—major buyers of oil from these countries—likely to be significantly affected.

Potential reductions in Venezuelan and Iranian oil exports could be material to global supply. According to the US Energy Information Administration (EIA), Iran’s oil output has been rising since 2022, currently reaching 1.5 million barrels per day, equivalent to 1.4% of global production. According to OPEC’s secondary sources, Venezuela’s production hit 900,000 barrels per day in the first quarter of 2025, with exports to the US reaching 250,000 barrels per day in January. Reuters reported that Venezuelan crude and fuel exports fell 11.5% in March compared to February, largely due to the latest US sanctions.

Source: Euronews

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Economic

The FX market has punished the U.S. Dollar and bought the Euro, confirming that it is the U.S. economy that will bear the brunt of the new tariffs announced by the White House on April 02.

At the time of writing Thursday, the Euro-to-Dollar exchange rate is 1.40% higher on the day at 1.10.

The currency market's behaviour reflects the reality that domestic consumers and businesses pay for tariffs and the arithmetic suggests the negative hit to the U.S. economy outweighs any losses suffered by the EU via lower exports.

"While a global trade war in theory is a euro-negative, the soft underbelly of the US economy is the dominant factor for EUR/USD right now. A much sharper sell-off in US equities, dragging US rates even lower, adds another nail in the coffin of US exceptionalism and could send EUR/USD over 1.10," says Chris Turner, head of FX research at ING.

Looking ahead, the rally's sustainability will depend on how the European Union reacts to U.S. tariffs, say some analysts.

"If Europe and China do symbolic retaliation and focus more on domestic support measures we could avoid a broad-based global risk reduction event," says Namik Immelbäck, Chief Strategist at SEB, the Swedish bank.

Under a U.S.-focussed selloff, the Dollar would likely stay under pressure, he explains. "Avoiding further escalation makes this a US negative event."

The European Commission President Ursula von der Leyen said on Thursday the EU is finalising a response to tariffs placed on steel and aluminium, suggesting it is still some way off from announcing a response to the April 02 tariffs.

The U.S. announced a 20% flat tariff rate on all EU imports. In response, Von der Leyen said the EU was preparing further countermeasures if negotiations fail.

This is a hard hint that the EU will negotiate on the matter as a preference to upping the ante.

SEB's view is that this path would prove supportive of European assets.

"Harder retaliation benefits no one – this is the game theory outcome the U.S. administration is betting on," says Immelbäck. "So far the comments from Brussels imply a tempered response / avoiding escalation."

Above: EURUSD at daily intervals.

He says such an approach increases the probability of a U.S. recession, the selling of U.S. equities, "and rate convergence leads to short USD vs Europe in particular."

George Saravelos, chief FX strategist at Deutsche Bank, says the U.S. "administration's approach to calculating the tariffs raises serious concerns about policy credibility, undermining the USD."

The tariffs the U.S. announced on various countries were based on crude calculus: The U.S. took into account its trade deficit with a given country and divided it by that country's exports to the U.S. to arrive at an alleged tariff rate.

For example, the U.S. has a $17.9BN trade deficit with Indonesia via imports amounting to $28BN. $17.9/$28 = 64%. That figure of 64% is claimed by the White House to be a tariff rate imposed by Indonesia on U.S. exports, which it clearly isn't.

The process undermines U.S. credibility and raises investor uncertainty towards U.S. policy and the domestic outlook.

Because tariffs are a tax on consumers, the U.S. economy is effectively facing a massive tax hike.

This is disinflationary, which will make the Federal Reserve's job of containing inflation a whole lot easier.

"The U.S. Treasury Secretary’s communication to the market right after the announcement emphasised fiscal tightening, while fiscal support from the rest of the world looks likely, further undermining relative US growth expectations," says Saravelos.

This implies the U.S. central bank now has more scope to cut interest rates, while other central banks have less scope.

This creates a convergence in interest rates that would drag on the Dollar relative to other global currencies, most notably the Euro.

Looking to potential targets, ING's Turner says major medium-term resistance sits in the 1.11/12 area. "It's hard to call a major break of that unless US activity craters."

Source: Euronews

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Stocks

World shares slid further Friday after U.S. President Donald Trump’s tariffs sent shudders through Wall Street at a level of shock unseen since the COVID-19 pandemic pummeled world markets in 2020.

Everything from crude oil to Big Tech stocks to the value of the U.S. dollar against other currencies has fallen. Even gold, a traditional safe haven that recently hit record highs, pulled lower after Trump announced his “Liberation Day” set of tariffs,’ which economists say carries the risk of a potentially toxic mix of weakening economic growth and higher inflation.

In early European trading, Germany’s DAX lost 0.7% to 21,568.78 while the CAC 40 in Paris slipped 0.7% to 7,547.19. Britain’s FTSE 100 gave up 0.6% to 8,426.10.

The future for the S&P 500 lost 0.4% while that for the Dow Jones Industrial Average shed 0.5%.

Markets in Shanghai, Taiwan, Hong Kong and Indonesia were closed for holidays, limiting the scope of Friday’s sell-offs in Asia.

Tokyo’s Nikkei 225 lost 2.8% to 33,780.58, while South Korea’s Kospi sank 0.9% to 2,465.42.

The two U.S. allies said they were focused on negotiating lower tariffs with Trump’s administration.

Australia’s S&P/ASX 200 dropped 2.4%, closing at 7,667.80. Bangkok’s SET fell 2.6%.

In other trading early Friday, the U.S. dollar fell to 145.87 Japanese yen from 146.06. The yen is often used as a refuge in uncertain times, while Trump’s policies are meant in part to weaken the dollar to make goods made in the U.S. more price competitive overseas. The euro edged lower, to $1.1054 from $1.1055.

Trump announced a minimum tariff of 10% on global imports, with the tax rate running much higher on products from certain countries like China and those from the European Union. Smaller, poorer countries in Asia were slapped with tariffs as high as 49%.

It’s “plausible” the tariffs altogether, which would rival levels unseen in more than a century, could knock down U.S. economic growth by 2 percentage points this year and raise inflation close to 5%, according to UBS.

That’s such a big hit it “makes one’s rational mind regard the possibility of them sticking as low,” according to Bhanu Baweja and other strategists at UBS.

Trump has previously said tariffs could cause “a little disturbance” in the economy and markets. On Thursday he downplayed the impact.

“The markets are going to boom, the stock is going to boom and the country is going to boom,” Trump said as he left the White House to fly to Florida.

The S&P 500 sank 4.8% to 5,396.52 and the Dow Jones Industrial Average dropped 4% to 40,545.93. The Nasdaq composite tumbled 6% to 16,550.61.

Some of the worst hits walloped smaller U.S. companies, and the Russell 2000 index of smaller stocks dropped 6.6% to pull more than 20% below its record.

Investors knew Trump was going to announce sweeping new tariffs, and fears surrounding it had already pulled Wall Street’s main measure of health, the S&P 500 index, 10% below its all-time high.

Some analysts and investors believed Trump might use tariffs simply as a tool for negotiations, rather than as a long-term policy. But he indicated Wednesday that he sees them as a way to bring factory jobs back to the United States, which could take years.

The Federal Reserve could cut interest rates to support the economy, but lower rates can push up inflation, already a worry given that U.S. households are bracing for sharp increases to their bills due to the tariffs.

Yields on Treasurys tumbled in part on rising expectations for coming cuts to rates, along with general fear about the health of the U.S. economy. The yield on the 10-year Treasury fell to 4.04% from 4.20% late Wednesday and from roughly 4.80% in January.

A report Thursday said fewer U.S. workers applied for unemployment benefits last week, better than economists were expecting. A separate report said activity for U.S. transportation, finance and other businesses in the services industry grew last month, but by less than forecast.

Also early Friday, U.S. benchmark crude oil shed $1.27 to $65.68 a barrel. Brent crude, the international standard, was down $1.26 at $68.88 a barrel.

Source: AP

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Stocks

London stocks suffered more losses in early trade on Friday as Trump’s sweeping tariffs fuelled recession fears, and as investors eyed the release of the latest US non-farm payrolls report.

At 0830 BST, the FTSE 100 was down 0.5% at 8,428.75, having closed 1.6% lower on Thursday.

Investors were mulling comments from International Monetary Fund chief Kristalina Georgieva, who said that US tariffs were "a significant risk to the global outlook".

She said in a statement that it was "important to avoid steps that could further harm the world economy" and appealed to the US and its trading partners "to work constructively to resolve trade tensions and reduce uncertainty".

Kathleen Brooks, research director at XTB, said: "The March payrolls figure seems very stale and out of date after this week’s tariff announcements. Friday’s payrolls data will not be impacted by Trump’s extreme tariffs, we will need to wait for the coming months to see how this could impact the hard US economic data, which has only moderated slightly, compared to a sharp fall in the soft economic data since the start of 2025. Either way, payrolls are always worth watching.

"The market is expecting no major surprises from the March report, with 140k non-farm jobs expected to be created, the unemployment rate is expected to remain stable at 4.1%, and average hourly earnings are expected to have grown by 4% YoY, within the long-term range."

In equity markets, it was a similar story to Thursday in terms of which sectors were winning and which were losing, with banks under the cosh but defensive utilities on the rise.

Standard Chartered, NatWest, Barclays and HSBC fell, while SSE, Severn Trent and United Utilities gained.

BP slumped after the oil giant said that its chair was stepping down amid calls by investor groups for a shake-up of the board.

Helge Lund, who has held the role since January 2019, will leave "in due course", BP said, most likely in 2026 once his successor has been appointed.

The announcement comes less than a month after activist investor Follow This said it would call for a vote against Lund’s reappointment at April’s shareholder meeting.

The group is angry that Lund did not offer an investors a say on BP’s decision to scrap its energy transition targets.

Elsewhere, Travis Perkins rallied after an upgrade to ‘buy’ from ‘hold’ by Stifel, which said the risk/reward was compelling at a historically low share price.

Source: Sharecast

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Devin

Economic

Stocks

Over $2 trillion has been wiped out of the markets as the Dow lost over 1500 points on the day. Besides, the Nasdaq 100’s decline officially exceeds over 1000 points on the day and is now just 2% away from entering a bear market. Meanwhile, the mega-caps like NKE, AMZN, AAPL, META, etc., and a few more are bleeding, pushing the market participants into full panic.

A significant impact on the crypto markets has also been seen with the prices of Bitcoin, Ethereum, and XRP taking a major hit. The current market dynamics appear to be a reaction to the tariffs announced yesterday, suggesting that the US growth in 2025 is likely to be slower than the 1.7% that had been projected in March. Meanwhile, the Bitcoin price is still sustaining over the crucial support at $81,000, and only a drop below the levels could be dangerous for the upcoming price action of the entire crypto markets.

Does this point towards the beginning of a major pullback? A popular analyst anonymously known as Gordon finds it a good opportunity.

The analyst believes the people are currently fearful, which flashes a huge buying opportunity, and the S&P 500 has taken the worst hit after Trump’s inauguration compared to the previous presidents including Biden and Obama. Besides, Trump has been a huge crypto proponent and aims to put more governance and policies in place. However, his memecoin drained the liquidity and added uncertainty to the market. Therefore, the analyst suggests his 736.5K followers trust Trump’s process as greener days seem to be on the horizon.

The BTC price has slumped below $82,000, while the volume continues to rise, largely dominated by the bears. This hints towards a potential pullback that may drag the levels below $80,000 if the support at $81,017 is not defended. If, in case, the star crypto loses crucial support, the entire market is expected to plunge further. Meanwhile, the fearful market sentiments have not yet dropped ahead, which hints towards a potential rebound. Therefore, the BTC price is expected to revive a strong rise and prevent the crypto markets from plunging below the pivotal support.