Last week, U.S. President Donald Trump sent shockwaves through global markets by announcing the highest tariffs in a century against all of America's trading partners.

The impact of these measures was more severe than that of the pandemic, with U.S. markets bearing the brunt. The spike in the Cboe Volatility Index outpaced its European and Asian counterparts. The S&P 500 saw its worst drop since March 2020, the Nasdaq 100 entered a bear market, the U.S. dollar lost nearly 3% against major currencies, and gold soared above $3,165 per ounce, marking a new all-time high.

Soon after the announcement of the reciprocal tariffs, major trade partners began unveiling retaliatory measures. As fears of a full-blown trade war intensify, markets are likely to remain rattled by continued aftershocks.

Key Events and Data to Watch This Week

Trump's Reciprocal Tariffs Hit Hard: EU, Japan, India, and China Face Steep Duties

The reciprocal tariffs unveiled on April 2 had been anticipated for some time, and expectations had recently leaned toward a more moderate outcome. However, the measures turned out to be far more aggressive than expected.

All countries exporting to the U.S. were hit with tariffs of at least 10%, with significantly higher rates for some. The steepest tariffs targeted key trading partners: 20% for the European Union, 24% for Japan, 26% for India, and 34% for China.

Some countries previously targeted by other tariffs---such as Canada and Mexico---were exempted. Additionally, specific products like steel, aluminum, automobiles, copper, pharmaceuticals, semiconductors, and lumber were not included in the reciprocal tariff package. Sector-specific tariffs on steel, aluminum, and automobiles had already been implemented, and tariffs on other products are expected to follow soon.

Beijing Hits Back Hard, Raising the Stakes in U.S.-China Trade Clash

In response to the U.S. reciprocal tariffs, the European Union has been slow to announce any countermeasures, while Japan, India, and Australia said they would continue to pursue diplomatic avenues. Meanwhile, countries like Indonesia and Cambodia pledged to lower tariffs on U.S. goods. China, on the other hand, responded swiftly and forcefully.

Since Trump first took office, China has been the most heavily impacted by his tariff policies. The newly announced 34% reciprocal tariffs will be imposed in addition to earlier 20% tariffs on Chinese goods---bringing the total tariff burden above 50%. Furthermore, the "de minimis" exemption, which allows for duty-free imports up to $800 in value, will be eliminated for Chinese goods starting May 2.

Unlike earlier rounds of strategic responses, Beijing's latest countermeasures were broad and immediate. As of April 10, China will impose a 34% tariff on all imports from the United States. In addition, it will restrict exports of seven types of rare earth elements, halt poultry imports from two U.S. companies, and implement export controls on 16 American firms. Measures are also being introduced to limit outbound investments from Chinese firms into the U.S.

In a social media post, Trump downplayed China's retaliation, claiming the impact would be far more damaging to China than to the U.S.

Tensions between the world's two largest economies appear set to intensify further. Some economists believe the U.S. may have anticipated China's response and warn that even steeper tariffs targeting China could be next. Such a scenario would bring the world closer to a full-scale trade war---an outcome markets have long feared.

White House Downplays Recession Risk as Wall Street Sounds the Alarm

In remarks following the market turmoil, Trump said he would not negotiate any tariff reductions unless countries brought "extraordinary offers" to the table and fully closed their trade deficits. Additionally, he dismissed concerns over a potential recession.

Statements from Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and other officials echoed Trump's tone. They insisted there was no reason to price in a recession and defended the tariffs as necessary and justified.

However, most economists disagree. Wall Street banks have revised their U.S. economic forecasts downward, with some now predicting a recession.

Goldman Sachs raised its 12-month recession probability to 45% and cut its 2025 GDP growth forecast from 1.0% to 0.5%. Citi revised its growth forecast down to 0.1%, UBS to 0.4%, and JPMorgan went further, slashing its full-year (Q4/Q4) real GDP forecast from 1.3% to -0.3%.

Powell Signals Caution as Tariffs Threaten Fed's Dual Mandate

Federal Reserve Chair Jerome Powell acknowledged that tariffs could significantly slow growth and push inflation higher. Speaking at an event on Friday, he emphasized the need to prevent one-off price increases from turning into a persistent inflation problem. He reiterated that the Fed would wait for more clarity on the economic impact of tariffs before adjusting interest rates.

Previously, Powell had argued that the inflationary effects of tariffs would be temporary. However, his latest comments suggested the possibility of more lasting impacts, indicating the Fed is prepared to maintain a cautious stance in light of inflation risks.

On the other hand, if tariffs simultaneously slow growth and raise inflation, the Fed could face a dilemma in balancing its dual mandate.

Friday's data showed that the labor market remains resilient. The unemployment rate edged up slightly to 4.2%, while nonfarm payrolls rose by a solid 228,000. Still, if tariffs weigh on economic activity as expected, the labor market could weaken in the months ahead.

JPMorgan economists forecast that slower activity could dampen hiring and push the unemployment rate to 5.3% over time. Such a scenario could force the Fed to continue cutting rates.

JPMorgan expects the Fed to begin lowering rates in June and cut at every meeting through January, bringing the target range to 2.75%--3.00%. Goldman Sachs, in a recession scenario, sees as much as 130 basis points of easing by year-end, and in a non-recession case, expects three 25-basis-point cuts.

Meanwhile, swap market pricing currently reflects expectations for four quarter-point cuts by the end of the year.

What's Ahead This Week: Inflation Data, Fed Minutes, and Tariff Fallout

Growing expectations for Fed rate cuts are likely to keep the U.S. dollar under pressure, while investors will look to this week's release of the March meeting minutes for further clues on policymakers' views regarding the path of monetary policy.

Meanwhile, Thursday's release of the March Consumer Price Index is expected to show the slowest pace of inflation since last July. Economists forecast a modest 0.1% month-over-month increase. Investors will be watching goods inflation closely for early signs of the impact of last month's tariffs on Chinese imports.

The Producer Price Index, due Friday, will be closely watched for signs of cost pass-through to consumer prices, as well as for movements in the categories that are included in the Fed's preferred measure of inflation.

Lastly, on Friday, the University of Michigan will release the preliminary results of its consumer sentiment and inflation expectations survey, offering a real-time snapshot of what U.S. consumers are expecting.

It will take time for the full economic impact of the latest reciprocal tariffs to show up in official data. Until then, recession fears and elevated uncertainty are likely to dominate sentiment. This may drive investors out of the dollar and toward other traditional safe-haven assets such as the Japanese yen, Swiss franc, and gold.