Global Leading Indicators, March 2025 - The world before tariffs, and after
The March 2025 edition of the global LEI chartbook can be found here. Additional details on the methodology are available here. I’ve added a few new elements: a chart showing the G20 LEI and its three-year rolling Z-score; a comparison between headline LEI diffusion and global equities; and a chart of the first three principal components of the LEIs. Of these, the first component is the most significant—as I’ll explain below.
As the name suggests, leading indicators are designed to provide early signals on the business cycle, and by extension, on the cyclical component in financial markets and the most cyclical individual sectors. However, there are times when turning points or events disrupt the underlying conditions so abruptly that they effectively reset the clock. Trump’s tariff shock—and its implications for global goods and capital mobility—is one such event. But for the record: what did the global economy look like on the eve of this tariff shock? As it turns out, it was doing quite well.
As of March, 10 of the 16 leading indicators in this sample were turning up, consistent with a broad-based cyclical upturn. This matches the number from February, post-revisions. That said, it’s a decline from the recent peak of 12 in October last year and represents a broader softening trend by mid-2024. In other words, while global LEIs were still broadly rising at the end of Q1, momentum had begun to fade. We should now prepare for a sharp downturn. The coincident indicator, in this context, is hopelessly behind the curve—it will show strength in Q1 but deteriorate sharply in Q2, with that weakness likely extending into Q3.
A significant hit to global leading indicators is now a fair bet—even assuming a relatively swift de-escalation between Trump and China. The key distinction between a short, sharp shock and a more prolonged decline (potentially spiraling into a global recession or financial crisis) hinges on the unpredictable behavior of the U.S. president, his advisors, and possibly Congress—who may yet intervene.
The sharp drop in equities so far in April suggests that leading indicators are starting to roll over. Still, it’s always risky to rely solely on market indicators. At this point, it's the combination of deteriorating markets, the real economic impact of U.S. trade policy, and the profound uncertainty injected into the global economy that will drive the deterioration in economic leading indicators.
The March LEIs indicate a slight broadening in weakness. Four economies—UK, India, Indonesia, and Brazil—joined the category of “high but falling.” Mexico and Japan remained in outright downturns. We should expect this breadth to deteriorate meaningfully in the months ahead.
As for the principal components analysis: this feature is still evolving. The first, and most significant, principal component (PC1) tends to peak during downturns, suggesting that when things fall apart, business cycles become highly correlated. At the end of Q1, PC1 remained low, signaling weak inter-correlation among LEIs—consistent with, though not confirming, a broad-based upturn in the global economy. As a synchronous global downturn begins, we can expect PC1 to rise sharply, though time will tell how strong this shift will be on this occasion. A natural extension of this framework would be to model each LEI using PC1 as an explanatory variable, extracting the residuals to isolate the domestic cycle. Such an approach might yield useful insights for evaluating domestically-oriented equity and credit markets in some countries. Stay tuned for more on this.
… And after Trump’s tariffs?
Markets reacted sharply to President Trump’s tariff announcements. Then came the delay on non-China tariffs, followed by weekend news that consumer electronics would be exempt from reciprocal tariffs—effectively lowering the average tariff rate on Chinese imports. Equities are likely to rally on Monday, the dollar to strengthen, and yields to fall—at least at the open. Still, I remain deeply concerned about current market sentiment and the prevailing narratives among analysts. I am hearing three broad narratives at the moment.
The “4D Chess” Theory – Some still believe Trump is executing a master plan to bring China (and the rest of the world) to heel. He’s not. He doesn’t know what he’s doing.
The “Trump Will Blink” Argument – Others believe he’ll ultimately walk back the tariffs. This view gained traction after recent U-turns. But it’s a fragile position. On Friday, stocks didn’t plunge—despite bond market warnings—because investors were waiting for another tweet to send the market soaring. That’s telling. Investors were more afraid of missing a counter-rally than concerned about a potential collapse of the global economy. Betting your investment strategy on a gradual White House retreat? Are you sure Trump won’t interpret a market rally as permission to double down?
Crisis risks are rising, but the Fed won’t allow it to happen – Risks of a global economic and financial crisis are rising, but not to worry, the Fed won’t allow it to happen. Howard Marks—an investor and market observer I have enormous respect for—recently re-posted his “crisis memo”. Mr. Marks finishes with the line that;
Everyone was happy to buy 18-24-36 months ago, when the horizon was cloudless and asset prices were sky-high. Now, with heretofore unimaginable risks on the table and priced in, it’s appropriate to sniff around for bargains: the babies that are being thrown out with the bath water. We’re on the case.
The problem? We haven’t priced in anything close to a 2008-style crisis—let alone the fundamental restructuring of global trade and capital flows implied by Trump’s tariffs. Global equities are down about 20% from their highs, just entering bear market territory. That decline is entirely reasonable if Trump is even half-serious about implementing these tariffs. Last week’s bond market freakout? I suspect much of it was performative—intended to pressure Trump into backing down again. Yes, the breakdown in correlation between the dollar and yields was ugly. But given the economic spectacle playing out, it’s hard to argue that yields falling represents something "breaking," except of course for investor confidence in USD assets commensurate with the stated economic policy of the White House. You think the Fed will step in? Fair enough, but will it be before or after Mr. Trump has fired Jerome Powell. I know that I am just an economist, but if veteran traders and strategists interpret last week’s action as capitulation in the face of sustained U.S.-China tension over trade and capital flows, I’ve got a bridge to sell them. What if this was the plan all along, as Michael Pettis—whose intellectual framework undergirds the disastrous trade policy by the White House—suggests. Jens Nordvig is making a similar point here.
Markets are pricing-in a U-turn
It is possible that Mr. Trump is now staging an embarrassing climbdown from a monumental unforced policy error. If he is, it makes sense to buy risk assets. But the question investors need to ask themselves is what price they’re willing to buy, given the tail risk. How do you price-in a tail risk that is, almost literally, 'unimaginably' bad. The answer I suspect is not at all, and then suddenly. If that happens, maybe we’ll need to revisit Howard Marks’ crisis memo. But until then, let’s be honest about what we’re seeing: a market priced for Trump to fold like a cheap suit. The sell-off in Treasuries is linked to that story, based on the idea that it is exactly such price action that will ultimately force the president to fold. And while that outcome is certainly possible—maybe even likely—my gut says this isn’t over just yet.