Week Ahead: Market Recovery Prospects, Political Risks, and Fed Policy Signals

Markets saw partial relief last week as U.S. President Donald Trump softened his tone on tariffs and walked back comments about removing Federal Reserve Chair Jerome Powell. While Trump's conciliatory rhetoric helped boost risk appetite—lifting equities and strengthening the U.S. dollar—uncertainty remains high due to mixed signals on trade policy, especially with China.

Trump hinted at potential tariff reductions if a deal is reached with China, but Beijing denied any progress, and tariffs between the two nations remain elevated, threatening global trade. Although some reports suggest China may exempt select U.S. imports, analysts believe this move primarily protects Chinese industries rather than signaling de-escalation.

Economists remain cautious, warning that rumors alone are insufficient for a sustainable market rally. Aggressive tariffs are already expected to slow U.S. GDP growth to 1.4% in 2025, pushing inflation higher and raising the recession risk to 45%. Despite recent rebounds, foreign investors have withdrawn $63 billion from U.S. equities, with concerns lingering about lasting dollar weakness.

U.S. consumer sentiment also deteriorated, with inflation expectations reaching their highest levels since 1991. Worries about the labor market and economic outlook are weighing on confidence, and recent polls show declining approval of Trump’s economic management.

This week, key U.S. data—GDP, inflation, and employment reports—will be closely watched for signs of tariff impacts. Analysts forecast Q1 GDP growth at just 0.4%, a sharp slowdown. Core inflation is expected to remain elevated, while the labor market shows resilience but hints at slower job growth.

Markets also await the Fed’s policy stance ahead of the May meeting, as easing bets grow amid slowing growth and higher inflation. Global data from the Eurozone, China, and Australia will also be in focus.