Stagflation Spectre Looms as Trade Wars Escalate

Markets continued to decline after digesting the impacts of global tariffs, with analysts now entertaining the real possibility of stagflation and an eventual recession.

Stock Market Selloff Intensifies

Stock markets fell for a second consecutive day on Friday after US President Trump announced sweeping tariffs as part of the "Liberation Day" initiative, with the tech-heavy Nasdaq bearing the brunt of the selloff, plunging over 20% from its recent peak and officially entering bear market territory. Other major US indices also saw substantial declines, falling further into correction territory. The selling pressure even dragged on gold, which fell in the latter part of last week, as investors likely liquidated trades to stave off margin calls. The turmoil appears far from over, with futures indicating further pain on Monday. The benchmark S&P 500 is expected to shed 3%, and the Nasdaq is poised for a 4% drop at the open, with assets across various sectors, including oil, metals, and cryptocurrencies, remaining under pressure.

The baseline 10% tariff took effect immediately, but the higher rates are scheduled to come into effect on Wednesday. Thus far, only China has responded with reciprocal tariffs, although many others, including the European Union, have threatened to impose their own tariffs. US Treasury Secretary Scott Bessent stated that over 50 countries have contacted the White House about reducing tariffs, suggesting that the current tariff regime of levies could be adjusted or lifted for a significant portion of trade partners. US President Donald Trump has insisted on sticking to the tariffs despite the market selloff.

Recession, Crash, Stagflation?

The implementation of tariffs has overshadowed the positive jobs report released on Friday. Despite the addition of 228K jobs exceeding expectations of 140K, the unemployment rate rose to 4.2%, but that was in line with a rise in the labour force participation rate. While this might be an indicator that any problems in the US economy haven't hurt the jobs market yet, it puts a damper on hopes that the Fed might step in to provide liquidity by easing, since the latest report showed continued tightness in the labour market that could contribute to persistent inflation.

JPMorgan, drawing on its CEO's history, has been the first major institution to forecast a recession in the US during the second half of the year, citing tariffs. Other economists have acknowledged the rising risk of an economic contraction, but they have not gone as far as predicting a recession. Meanwhile, the market is pricing in a scenario akin to stagflation, anticipating just two rate cuts from the Fed this year. However, these projections are predicated on the assumption of a more permanent tariff regime, with the US economy bearing higher costs for the remainder of the year. Recent comments from the Administration suggest an intention to negotiate down the tariffs, and the accuracy of recession predictions may hinge on the speed at which "zero tariff" deals are announced, which have only been hinted at thus far.

Gold Dead-Cat-Bounce Looming

A potential dead-cat-bounce (DCB) pattern might have emerged for gold, opening the door for a drop towards $2810 per ounce from the breakout point at $2970. If the $2955 level holds, a short-term bounce may ensue or even a reversal if bulls reclaim $3050 and $3100. The next resistance above the record peak of $3170 lies at $3200 and the $3250 round levels.

Source: SpreadEx / Gold

Key Takeaways

The implementation of tariffs has raised concerns about the potential economic impact in the US, with fears of stagflation and recession looming. Market participants are closely monitoring the situation, as the ultimate impact will depend on the duration and scope of the tariff measures and the ability to negotiate favourable trade agreements.