Global markets weekly update

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Tariff headlines and recession worries weigh on stocks

U.S. stocks posted losses for the week, with the S&P 500 Index, Nasdaq Composite, and Russell 2000 Index all notching a fourth consecutive week of negative returns and the S&P MidCap 400 Index falling for the seventh week in a row, while the Dow Jones Industrial Average slid 3.07%, putting all five indexes into negative territory for the year. Ongoing uncertainty surrounding trade policy seemed to drive much of the negative sentiment as new tariff announcements from the Trump administration continued throughout the week. Growth concerns and increasing recession fears—which were amplified by comments from President Donald Trump regarding a “period of transition” for the U.S. economy—also weighed on sentiment during the week.

Price growth slows in February

The week’s relatively light economic calendar was highlighted by Wednesday’s release of the Labor Department’s consumer price index (CPI), which indicated that consumer prices rose 0.2% month over month in February, while core CPI (less food and energy) saw its lowest year-over-year increase since April 2021, rising 3.1% over the prior 12 months. February’s readings for both monthly and annual inflation slowed from January, and both were slightly below consensus expectations. The encouraging inflation print seemed to help alleviate some concerns about the U.S. economy entering a period of stagflation—an economic scenario in which growth is stagnant, inflation is high, and unemployment rises; however, data from the report predate a large portion of the Trump administration’s recent tariff actions, and investors were quick to return their focus to the uncertainty surrounding the impact that these actions will have on prices over the next several months.

Thursday’s producer price index (PPI) data painted a similar picture for February, with headline prices unchanged from January and core prices declining for the first time since July compared with expectations for a 0.3% increase for both readings. While the overall results appeared promising, several components of the PPI that feed into the personal consumption expenditures (PCE) index—the Fed’s preferred measure of inflation—remained elevated, which suggests that the PCE will likely remain well above the Fed’s 2% target when it is released at the end of the month. Fed policymakers are widely expected to hold interest rates steady following their upcoming meeting on March 18–19.

Meanwhile, the University of Michigan reported its Index of Consumer Sentiment for March on Friday morning, which declined 11% month over month to 57.9. The index has now declined three months in a row and is down 22% from December 2024. According to the report, consumer expectations “deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets,” primarily due to “uncertainty around policy and other economic factors.” Notably, year-ahead inflation expectations increased to 4.9% from 4.3% in February, the highest since November 2022 and the third consecutive monthly increase of 0.5 percentage points or more.

Treasuries advance on cooler inflation print

U.S. Treasuries generated positive returns heading into Friday as yields decreased across most maturities in response to the week’s cooler-than-expected inflation data. (Bond prices and yields move in opposite directions.) Municipal bonds underperformed Treasuries amid seasonal weakness and a general risk-off sentiment.

Investment-grade bond spreads widened through Thursday, and new issuance in the market was lighter than expected. According to T. Rowe Price traders, the week’s sell-off in equity markets also weighed on sentiment in the high yield bond market. They noted that the asset class’s performance was somewhat bifurcated, as most buyers focused on BB rated names, while lower-quality credits and industries that are likely to be impacted by tariffs came under pressure.

In local currency terms, the pan-European STOXX Europe 600 Index ended 1.23% lower amid worries about how U.S. trade tariffs would affect economic growth and uncertainty over monetary policy. Along with hopes for a Ukraine-Russia ceasefire, news that Germany’s incoming chancellor had secured parliamentary support for a large increase in state borrowing helped to curb losses. Major stock indexes were lower or flat. France’s CAC 40 Index dropped 1.14%, while Germany’s DAX and Italy’s FTSE MIB eked out modest gains. The UK’s FTSE 100 Index fell 0.55%.

ECB policymakers express doubt about April rate cut

Days after the European Central Bank (ECB) decided to lower interest rates for a sixth time since June, comments from a clutch of policymakers appeared to cast doubt on another cut in April. “Exceptionally high uncertainty” could make it harder for the ECB to meet its 2% inflation target in the short term, ECB President Christine Lagarde suggested in a speech in Frankfurt. Executive Board member Isabel Schnabel warned that inflation was more likely to remain above the target than fall below it, indicating her reluctance to back an even easier stance, according to the Handelsblatt newspaper. Governing Council member Martins Kazaks said at a conference in Lisbon that rate-setters needed to keep an open mind on April’s decision because of uncertainty stoked by geopolitical shocks and a potentially massive increase in defense spending, according to Bloomberg. In contrast, in an interview with The Wall Street Journal, Bank of Portugal governor Mário Centeno stuck to his view that borrowing costs needed to be even lower to shore up a weak economy and prevent inflation from settling below target. “I would prefer to move sooner rather than later,” Centeno said.

UK economy struggles to lift growth

The UK economy unexpectedly shrank 0.1% in January, reflecting a fall in production. Gross domestic product (GDP) had expanded 0.4% sequentially the month before. Nevertheless, the rolling quarterly growth rate of 0.2% was higher than the 0.1% posted in December.

German parties “agree” to boost spending

Germany’s coalition government-in-waiting and the Greens agreed to a deal for a huge increase in state borrowing, according to two sources close to the talks cited by Reuters. Friedrich Merz, the next chancellor, wants the outgoing parliament to approve a EUR 500 billion infrastructure fund and a loosening of the so-called debt brake to increase spending on defense.

Japan’s stock markets rose modestly over the week, with the Nikkei 225 Index gaining 0.45% and the broader TOPIX Index up 0.27%. The yen weakened to around JPY 148.7 against the U.S. dollar, from about 148.0 at the end of the prior week, providing a tailwind for Japanese exporters. However, uncertainties about global trade dented sentiment, capping gains. Japan is particularly concerned about the Trump administration’s proposed duties of around 25% on imported cars, as autos make up roughly one-third of Japan’s total exports to the U.S.

Unions secure large gains in spring wage negotiations

Investors focused on the takeaways from Japan’s spring “shunto” labor-management wage negotiations, which secured the largest pay deal in more than three decades and indicated a steady wage growth trend, including among smaller companies. The spring wage negotiations have now delivered significant wage increases for three straight years. Factoring into the Bank of Japan’s (BoJ) decision-making, wage growth momentum could influence the timing of the central bank’s next interest rate hike as it watches for a virtuous cycle of wages rising in tandem with prices, driving economic progress. Market views that the central bank will raise rates again later this year are firmly entrenched.

The yield on the 10-year Japanese government bond (JGB) hovered around its highest levels since the 2008 global financial crisis in anticipation of further rate hikes this year. BoJ Governor Kazuo Ueda said that the rising JGB yield trend since last year was a natural reflection of the market’s view on the economy and inflation, or shifts in interest rates overseas, and emphasized that bond yields should be determined freely in the market. Ueda emphasized that only if yields rose sharply in a way that differs from normal market movements would the central bank step up its JGB purchases to curb yield rises. Some interpreted this as raising the bar for intervention.

Mainland Chinese stock markets rose on stimulus hopes after Beijing said it would hold a press conference on Monday with policymakers focusing on boosting consumption. The onshore benchmark CSI 300 Index advanced 1.59%, and the Shanghai Composite Index added 1.39% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index shed 1.06%.

Officials from China’s finance ministry, commerce ministry, central bank, and financial markets watchdog are expected to appear at Monday’s briefing, which “will introduce the situation of boosting consumption,” according to the announcement from the State Council. News of the conference sparked a rally in Chinese shares on Friday, pushing the CSI 300 Index to its highest level since mid-December.

Increasing consumption to drive economic growth has become more important for China’s policymakers since the onset of the U.S.-sparked trade war. At the just-concluded National People’s Congress meeting, China set an ambitious economic growth target of about 5% for the third straight year and stated that boosting consumption is the government’s top priority for 2025.

Weak domestic consumption was underscored in China’s latest inflation report. The consumer price index fell a greater-than-expected 0.7% in February from a year ago, according to the statistics bureau, marking the first contraction since January 2024. The core CPI—which excludes food and energy costs—declined 0.1% year on year, its first decrease since 2021 and only the second time the gauge contracted in more than 15 years, according to Bloomberg. Meanwhile, the producer price index, which tracks wholesale prices, fell 2.2% in February, its 29th straight monthly contraction.

Stamping out deflation is a matter of growing urgency for Beijing, which rolled out a slew of monetary and fiscal stimulus measures last September to spur demand. But a yearslong housing slump has prompted people to save rather than spend, frustrating officials’ attempts to bolster consumption.

Hungary

Inflation acceleration likely to keep central bank on hold

Earlier in the week, the Hungarian government reported that inflation in February was measured at a year-over-year rate of 5.6%. This was higher than expected and higher than January’s 5.5% reading. In fact, it was the second consecutive monthly upside inflation surprise.

Looking at the underlying data, T. Rowe Price credit analyst Ivan Morozov concludes that inflation acceleration is pretty broad-based, with core inflation accelerating to more than 6% versus 5.8% year over year. While inflation in the next few months should decline due to base effects, Morozov believes that the current level of inflation doesn’t give much room for the central bank to cut short-term interest rates. He expects policymakers to keep rates steady until sometime in the second half of the year, and possibly all year.

Poland

Rates remain unchanged amid expectations for above-target inflation this year

On Wednesday, Poland’s central bank concluded its regularly scheduled two-day monetary policy meeting and kept its key interest rate, the reference rate, at 5.75%. Policymakers also left other interest rates controlled by the central bank unchanged.

According to the post-meeting statement, policymakers acknowledged that the global outlook for inflation and economic activity is “fraught with uncertainty, which is related to…changes in trade policies” and other factors. In the Polish economy, central bank officials acknowledged that year-over-year GDP growth accelerated to 3.2% in the fourth quarter versus 2.7% in the third quarter and that growth in domestic demand has been picking up.

As for inflation, policymakers noted that the annual consumer price index inflation rate in January rose to 5.3%, which is higher than the 4.7% reading for December and “significantly above” the central bank’s inflation target. They also observed that core inflation is “elevated, mainly due to rapidly rising services prices, amid high wage growth.” Given that policymakers expect inflation this year to be “markedly above” the central bank’s inflation target, it is unsurprising that they decided to leave interest rates unchanged.

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T. Rowe Price Investment Services, Inc., distributor and T. Rowe Price Associates, Inc., investment adviser.

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