“The only thing that makes life possible is permanent, intolerable uncertainty: not knowing what comes next.”

This has not been much of a week for bond or equity investors.  German bund yields rose dramatically as the new government announced its intention to borrow an additional 900 million euros to spend on defence and infrastructure. The ECB went through with the 25 basis point cut to interest rates yesterday, maybe a little reluctantly, as Ms Lagarde indicated that a pause was likely in the coming months while the central banks tried to make sense of the current economic climate.

It is probably fair to say that equity markets, particularly the US ones, are in a period of turmoil. Mr Trump probably expected the US market to rally yesterday after he announced a pausing on Thursday of the 25% tariffs on Mexico and Canada three days after they were imposed. All that did was create a greater level of uncertainty, which markets do not like. As well as the political uncertainty, economic uncertainty is rising,

We have seen indications of weakening growth in the US. The release of the latest Beige Book survey reported that businesses across the country reported uncertainty surrounding new policies from the Trump administration. Atlanta Fed produces what it describes as a running estimate of real GDP based on available economic data; it calls it GDPNow. According to its latest estimates based on its model, real GDP growth in the first quarter of 2025 was -2.4 %. So you have political and economic uncertainty, and as a result, you have seen quite a correction, particularly in the well-loved and highly-priced technology sector. The Nasdaq Composite is down more than 10% from its recent peak, and the Mag 7 is down over 15%. The optimism that greeted the arrival of Mr Trump just a few months ago has evaporated, it would appear.

Costco is probably not a bad bellwether on the health or otherwise of the US consumer. Yesterday, it announced earnings that missed slightly on revenues that were slightly ahead. The stock trades on a current price to earnings for next year of over 50x, a premium to the 10-year average of closer to 36x, also during a period of zero interest rates. It’s a great business model, but this is a good example of pricing to perfection.

Later today, we will receive the monthly non-farm payroll report, average earnings, and the latest estimate of the unemployment rate. This data will be a good test for market sentiment. A weak number may encourage bond markets to bring their expectations of the timing of the next Fed cut further forward, which may support a rally in equity markets, particularly if met with a better-than-expected wage report: a weak employment report and a stronger-than-expected average earnings number may increase the volatility. In the short term, sentiment has swung into bearish territory, suggesting that maybe we are due for a modest bounce, though it does not look like that is the case for Europe today, at least at the start of the day.