Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

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U.S. markets on Wednesday were determined to put on a brave face ahead of U.S. President Donald Trump's announcement of sweeping tariffs that will escalate a global trade war and threaten to upend the entire international trading system. 

Stocks rose sharply and Treasuries and the dollar ended notably weaker. Buoyed by hope or expectation that the tariffs would't be as draconian as feared, U.S. indices closed in the green. The deeper analysis of the tariff fallout - lower growth and higher inflation - will be for tomorrow and beyond. 

Fed policymakers and other central bankers are in a bind - do they respond to the weaker growth impulse, or higher inflation? More on that below, but first, a round up of today's main market moves. 

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So, 'Tariff Man' has shown his hand, and now markets nervously await the response from the rest of the world. Most countries will probably play their cards cautiously and carefully, which is what Britain's finance minister Rachel Reeves and Mexican President Claudia Sheinbaum on Wednesday indicated they will do.

Trump's tariff salvo adds to the long list of protectionist shots fired since his inauguration in January. The extent of the pain and damage remains to be seen, and earlier on Wednesday European Central Bank President Christine Lagarde said it will be "negative the world over" and Bank of Japan Governor Kazuo Ueda said the hit to global trade could be huge. 

Few would argue, although the latest global readout points to a mixed picture in the first quarter as economies grappled with historically high levels of uncertainty and braced for impact - factory activity in India expanded at the fastest pace in eight months, while industrial production in Brazil unexpectedly fell; Mexico's government on Tuesday lowered its 2025 GDP growth forecast, but to a still rosy 1.5%-2.3%.

The most recent U.S. economic indicators suggest activity and the labor market have held up pretty well ahead of "T-Day" - durable goods orders rose solidly in February and ADP private sector payrolls growth in March beat expectations. 

Although the economist consensus is still for GDP expansion in the first quarter and beyond, forecasts are being cut across the board - JP Morgan's Michael Feroli, for example, slashed his Q1 forecast to 0.0% from 1.0% and his 2025 call to 1.3% from 1.6%.

Still, these and most forecasts are significantly brighter than the Atlanta Fed GDPNow model's gloomy etimate of 1.4% GDP contraction in the first quarter when adjusted for outsized gold imports. 

Thursday is the first day in the new world of Trump's tariffs, and there's huge uncertainty and risk for investors to navigate. Let's see if their optimism from the previous day spills over.

Focus on the "stag". Ride out the "flation". That may be the Federal Reserve's optimal plan for handling the new wave of tariffs coming from the Trump administration.

With details of U.S. President Donald Trump's sweeping tariffs now emerging, all eyes will soon turn to the Fed's and other central banks' response to the president's "liberation day" duties that could leave them in quite a bind. 

It's generally agreed that tariffs are damaging to growth and inflationary, initially at least. So how should central bankers react? Do they cut interest rates to prop up a stagnating economy or raise them to cool fiery price pressures?

According to a Minneapolis Fed working paper published last month, the answer is clearly the former. The authors find that the "optimal" policy response to tariffs is not just to look through the inflationary impact and keep rates steady, but to go even further and ease policy.

"The optimal monetary response is to stimulate the economy, raising aggregate income and boosting demand for imported goods," wrote Minneapolis Fed economist Javier Bianchi and University of Wisconsin-Madison assistant professor Louphou Coulibaly.

If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.