Market Insights | April 2025
The Trump Put: Volatility, Tariffs, and Central Bank Caution
Key Takeaways:
- Forced Liquidations Drive Volatility: Cross-asset selling, points to margin calls and deleveraging, not foreign Treasury liquidation.
- Trump’s Tariff Pause Suggests Market Sensitivity: Rising Treasury yields likely influenced the decision to delay reciprocal tariffs.
- Growth Risks Rising: Persistent trade uncertainty threatens to shift sentiment-driven weakness into hard economic data.
- Diverging Inflation Expectations: Short-term and long-term inflation expectations are softening, reflecting growth concerns.
- Bank of Canada Poised to Act: Rate cuts are likely after the Election to support economic stability and competitiveness.
Market Volatility and Forced Liquidations
Recent market volatility has intensified, characterized by sharp, simultaneous declines in equities, bonds, and commodities. This broad-based selling suggests forced liquidation—likely by prime brokers addressing margin calls for leveraged funds, including Risk Parity Funds. These portfolios, normally diversified across negatively correlated assets, faced dual declines when correlations broke down under liquidation pressure.
Uncertainty around a possible “Trump Put” has further fueled volatility. Despite earlier claims of market indifference, on April 9, President Trump announced a 90- day pause on reciprocal tariffs after U.S. 10-year Treasury yields approached 4.50%, suggesting sensitivity to rising yields. Notably, foreign demand for Treasuries remained strong during recent auctions, undermining fears of a broad foreign liquidation.
Soft Data vs. Hard Data Divergence
While sentiment has deteriorated sharply “soft data”, it has not yet been fully validated by “hard data” indicators like spending and investment. However, persistent trade war uncertainty could lead to precautionary hoarding of goods and cash, creating a feedback loop that suppresses economic growth.
Inflation Expectations Show Signs of Shifting
As concerns about economic growth mount, short-term (1-year) U.S. inflation expectations have begun to level off, while long-term expectations, derived from Treasury markets, are starting to decline. This trend signals growing market concern about future demand softness, even amid tariff pressures.
Tariff Impacts: Supply Shock vs. Demand Shock
Tariffs are expected to have different impacts on the U.S. and Canadian economies:
• U.S.: Tariffs will likely trigger a supply shock, pushing prices higher and possibly leading to shortages.
• Canada: Tariffs will act as a demand shock, reducing export demand and threatening domestic employment and business activity.
Index Question
Contributions to
UMich Consumer
Source: University of Michigan, Bloomberg, April 2025
Bank of Canada: Post-Election Policy Shifts Likely
The Bank of Canada held rates steady at its last meeting, despite mounting economic pressures. A pre-emptive rate cut would have been beneficial—supporting the economy, weakening the Canadian dollar, and boosting exports—but was likely deferred due to the approaching Election. Post-Election, rate cuts are expected as the Bank shifts focus to supporting growth and competitiveness.
Long-Term
Expectations Retreat
Consumers fear inflation more than market participants
Source: Bloomberg, April, 2025
The commentaries contained herein are provided as a general source of information based on information available as of April 30, 2025 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Market conditions may change and Caldwell Investment Management Ltd. accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
Published on April 30, 2025