Markets remain cautious: Stock gains fizzle; gold consolidates amid recession fears
Regarding market response, Wael Makarem believes that since the decision to hold interest rates was largely expected, markets will focus on the tone of the Federal Reserve’s statement and Powell’s remarks—especially given the continued decline in inflation levels. He noted that equities could experience volatility or come under pressure if the tone is hawkish.
He added that gold may find support as a safe haven amid ongoing uncertainty, while commodity prices are facing pressure due to concerns over a global growth slowdown driven by tariffs. Meanwhile, the dollar is expected to remain volatile, mainly influenced by trade policy expectations and interest rate outlooks.
Meanwhile, Farraj anticipated continued volatility, though movements may remain "relatively quiet" if rates are held steady. Stocks could see a slight uptick as rate hikes are ruled out, but gains are poised to be limited due to ongoing economic woes and trade tensions.
As for commodities, pressures are likely to persist, with gold potentially seeing a minor bump amid growing demand for safe havens.
The US dollar could also weaken in the short term if markets interpret the Fed’s stance as a signal for heightened growth concerns, though the dollar's "underlying strength" may cap this pullback, he added.
Meanwhile, with a rate hold being largely predicted, markets will focus on the tone of the Fed’s statement and Powell’s remarks, especially with inflation continuing to decline. He indicated that equities may face volatility or pressure if the tone is more hawkish, Makarem highlighted.
Gold may find support as a safe haven from anxious investors, while commodity prices face pressure from global tariffs-driven growth slowdown fears. The US dollar will likely remain volatile, weighed by both trade policy expectations and interest rates, he continued.
Meanwhile, Azzam believes a rate hold, combined with a cautious Powell speech, could temporarily boost risk appetite. However, the escalating tariff threats impose a cap on any strong rally, further anchoring the odds of risk asset pullbacks, especially as markets grow more sensitive to recession narratives: volatile equities, resilient gold, and a gradually weakening dollar as rate cut bets grow for late 2025.
“While keeping rates on hold may support value premiums, tariff pressures and weak earnings limit the upside, with defensive sectors like real estate and utilities likely to outperform cyclical ones,” Azzam stressed.
“Commodities may face more downward pressure due to worsening recession fears and reduced global factory demand for raw materials, weighing on prices despite a weaker dollar,” the research head added.
In 2025, given the persistently low real yields and rising safe-haven demand amid tariff escalation, gold is slated to be among the top beneficiaries with current rate holds and future cuts.
Tariffs blur Fed’s equation: Between inflation shockwaves & recession risks
Makarem expects the blanket tariffs to lead to significant GDP growth slowdown and higher inflation, effectively resulting in a stagflation shock. He noted that this could cause major losses in output and jobs, raising household costs.
If oil prices remain low due to reduced demand and an economic downturn, they may help trim inflation. In all cases, the Fed will reassess its direction based on actual data, but a sharp deterioration in the labor market could force rate cuts, he noted.
Meanwhile, Azzam clarified that the Fed may need to balance “tariff inflation” against “tariff recession” if summer data shows a noticeable slowdown in consumption and investment, while inflation remains elevated but manageable (1–1.5 points above target).
In that case, the Fed's tone may shift from prolonged patience to precautionary easing before the end of 2025, the research head underlined.
This is set to take place via gradual rate cuts, while continuing balance sheet reduction to contain price pressures, especially since the proposed 10% blanket tariff on imports could deliver a direct inflationary supply shock, he also noted.
These tariffs could raise US inflation forecasts for 2025 by about 1%, given their impact on prices of basic goods and related services. In the long term, the impact could be equivalent to a 6% drop in real GDP and a 5% decline in wages, costing the average US household roughly $22,000 annually, according to Azzam.
In the short term, every additional five bps in tariffs could add about 0.3 percentage points to the Consumer Price Index (CPI) over 12 months and subtract 0.25 points from growth, due to falling consumption and squeezed corporate margins, he further stated.
“Translating this to 10% tariffs would mean an additional 0.6–0.7 percentage points of inflation and 0.4–0.5 percentage points less growth by year-end, a figure that could rise depending on the US president’s protectionist agenda,” he continued.
On his part, Farraj sees that trade escalation and broad-based tariffs will squeeze growth and inflation, thus adding more pressure on the Fed to reassess its monetary stance.
If the trade war escalates and its impact is reflected in economic data, the US central bank may be forced to resort to monetary easing, despite the potential inflationary risks, he added.
Labor market faces critical test: Job growth slows as protectionist pressures soar
According to Makarem, despite the current labor market strength, pressures are likely to heighten in the coming months due to tariffs and a global growth slowdown.
Uncertainty is making companies reluctant to hire or invest. The sustainability of labor market resilience remains uncertain and will be put to test in the short term, he added.
Azzam explained that the labor market was key behind the Fed's 2024 rate easing cycle. Therefore, April’s job report (177,000 jobs, stable unemployment) seems satisfactory on the surface. However, these figures may not hold up for more than a few quarters.
He noted that hiring strength is concentrated in local services, while US manufacturing activity is expected to contract under sweeping tariffs, rising input costs, and falling orders. High inflation and weak real incomes could also hurt consumption, meaning that the main hiring drivers may stall.
“Job growth has already started slowing compared to previous months, as February and March figures were revised down by 58,000 jobs. With weakening global demand and shrinking margins due to protectionism, monthly job gains may fall to the 70,000–90,000 range by year-end, below the level needed to absorb labor force growth,” Azzam said.
The current data gives the Fed a “brief period” to delay rate cuts. However, the situation remains fragile amid tariff-induced inflation, industrial slowdown, and declining global trade. If wage or employment cracks begin to show, the door will reopen quickly for monetary easing, he also pointed out.
Meanwhile, Farraj stressed that the current labor market strength is no guarantee against an economic slowdown, as employment often reacts late to contraction.
The protectionist policies and slowing global growth pose strong headwinds that could gradually reveal labor market fragility in the coming months, potentially paving the way for a rate reduction later this year or next, even if conditions appear stable for now, he added.
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