Muzinich Weekly Market Comment: 100 days

May 2, 2025

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In our latest roundup of the key developments in financial markets and economies, we look back on a tumultuous first 100 days in office for the new US administration.

Franklin D. Roosevelt (FDR) became US President in 1933 during the depths of the Great Depression. His administration wasted no time, passing an extraordinary 15 major bills through Congress within his first 100 days in office, including banking reforms, unemployment relief programmes, and agricultural support initiatives.^[1] FDR coined the phrase "first 100 days," and ever since, it has served as a symbolic benchmark for presidential effectiveness.

For any new president, the first 100 days typically represent a period of momentum, a window in which to signal their priorities, leadership style and vision, while building credibility for their administration. For investors, however, this period can be tense, marked by policy shifts, event risks and uncertainty.

Recent history underscores the significance of the first 100 days. In 1961, John F. Kennedy faced a major setback with the failed Bay of Pigs invasion, an attempt to overthrow the Fidel Castro-led communist regime in Cuba.^[2] In 1981, Ronald Reagan swiftly advanced a sweeping tax-cut agenda.^[3] In 2009, amid the global financial crisis, Barack Obama passed the US$800 billion American Recovery and Reinvestment Act.^[4] And in 2021, Joe Biden signed the US$1.9 trillion American Rescue Plan to combat the economic fallout from the COVID-19 pandemic.^[5]

Bid for freedom

For two-time President Donald Trump, the defining event of his current administration’s first 100 days was “Liberation Day,” a reference to his aggressive attempt to reset US trade relationships through a global reciprocal tariff executive order.

Investors got their first taste of the effect of Liberation Data this week with the release of Q1 real GDP data, which showed the economy contracting for the first time since 2022, with output falling 0.3%.^[6] The weakness was entirely due to a surge in imports, which subtracted nearly 5% from the overall reading. 

Further signs of economic pressure are emerging from first-quarter earnings reports. McDonald’s Corp. reported a sharp decline in US sales, highlighting worsening consumer sentiment that is making it increasingly difficult for restaurants to attract diners.^[7] Same-store sales in the US fell 3.6%, the largest drop since the pandemic kept customers at home. The disappointing results follow similarly weak performance from Chipotle Mexican Grill and Starbucks.^[8]

Falling short

In searching for an economic roadmap to Liberation Day, comparisons with Trump’s first term fall short. During his first time, tariffs were largely focused on China and a limited number of historically protected industries, such as aluminium and steel. This allowed US importers to source goods from countries outside China, making prices relatively elastic. The tariff burden was shared among foreign exporters (through currency adjustments), company supply chains and consumers.

Second time around, unilateral tariffs have turned the tables as foreign producers have less incentive to offer concessions. As a result, US businesses and consumers will increasingly become price-takers, as domestic manufacturing alternatives remain limited in the short term. This is a textbook example of a negative supply-side shock.

The most recent example of such a shock happened during COVID-19. However, as an effective economic roadmap for Liberation Day, there is significant difference in the nature of the shocks. During the pandemic, the catalyst was a sudden and unexpected halt in production and supply chains as the world entered lockdown, which caused a sharp contraction in output capacity. In contrast, the shock triggered by Liberation Day stems from an unexpected increase in the costs of goods across the economy, particularly input prices.

When push comes to shove

Despite different causes, both scenarios share similar economic consequences - a leftward shift in the short-run aggregate supply (SRAS) curve, resulting in reduced output, slower economic growth, rising unemployment and higher prices, a textbook case of cost-push inflation.

However, there is an important distinction between a supply shock caused by a sudden increase in input prices and one caused by a sudden fall in productive capacity. In the former, the shock is cost-driven, and inflation is effectively “baked in” through rising input costs. This renders monetary and fiscal policy responses ineffective, as stimulating demand risks fuelling further inflation.

On the positive side, the potential recovery can often happen faster once prices stabilise or even normalise, allowing production and confidence to rebound more quickly. This helps explain the Federal Reserve’s preferred 'wait and see' approach, as it continues to maintain policy rates at restrictive levels above neutral. Currently, the overnight interest rate swap market is pricing in a 55% probability that the Fed will cut rates by 25 basis points in June.^[9]

Inspired by Brexit

An alternative school of thought views Liberation Day as the United States’ own Brexit moment. President Trump strongly endorsed Brexit, calling it “a great thing” and praised the UK for having “taken back their country” by voting to leave the European Union.^[10]

Both Brexit and the US tariff policy reflect a shift toward economic nationalism, a protectionist policy approach that prioritizes national sovereignty and domestic interests over global integration. These measures are rooted in the desire to reduce foreign influence and economic dependence, aiming to shield domestic industries from what are perceived as unfair global competition or pressures.

Brexit may not have been a total failure, but it is also fair to say it has not lived up to its proponent’s boldest promises. The UK now has full control over its own laws and regulations, and voters clearly understand that domestic politicians are solely accountable, with no EU institutions to blame.

In terms of sovereignty, the UK has regained control over its borders, implementing a points-based immigration system that treats EU and non-EU citizens equally. It has also taken back control of trade policy, signing a number of independent trade deals, including with Australia, Japan, and has a reworked partnership with the EU under the Trade and Cooperation Agreement.^[11]

Short straw

However, as an economic roadmap, the US administration should take note of Brexit’s shortcomings. Since the 2016 EU referendum, the UK has consistently underperformed relative to other advanced economies, experiencing a combination of slower growth and higher inflation.^[12]

The consensus among economists is that Brexit will reduce long-term GDP by around 5% compared to a scenario in which the UK had remained in the EU. This shortfall in output is largely attributed to a sustained decline in trade and investment, as new barriers have made the UK a less attractive destination for business and cross-border commerce.

The third channel through which Brexit has impacted the UK economy is via reduced immigration from the EU; as far as economic theory goes, when you lower labour supply, you diminish long-term potential output. However, the more immediate effect has been observed through inflation. The end of free movement has significantly reduced the elasticity of labour supply, making the labour market more cyclical and prone to inflationary pressures.^[13]

This shift has been a contributing factor to the post-pandemic surge in inflation and is likely to sustain labour market tightness in key sectors such as hospitality, agriculture, healthcare and logistics, which historically relied heavily on EU workers, and have experienced acute labour shortages. In addition, UK businesses now face increased regulatory and bureaucratic burdens when trading with the EU, including additional paperwork and compliance costs.

Taken together, these developments suggest that the decline in EU immigration has contributed to increased labour market rigidity, stronger wage pressures and a more persistent inflation profile in the post-Brexit UK economy.

As a final point of reference, the Conservative government was decisively removed from office in 2024, winning just 121 out of 650 seats, its worst electoral performance since the party’s founding in the 19th century.^[14]

The economic fallout from Brexit was clearly a contributing factor, mirrored by a significant shift in public opinion, with recent polls showing that more Britons now consider Brexit a mistake rather than a success (See Chart of the Week).^[15]

Rhyme or reason?

Mark Twain famously remarked that “history doesn’t repeat itself, but it often rhymes.” As investors, we should not be surprised that a new president’s first 100 days have brought economic friction and market volatility, nor that such turbulence may persist amid ongoing policy uncertainty.

Liberation Day represents a sharp supply shock to the US economy, fuelling cost-push inflation. In this context, the natural monetary adjustment is likely to play out through currency markets, specifically US dollar weakness, as conventional interest rate tools remain largely ineffective against supply-side inflation.

This dynamic will likely keep the FOMC in a “wait and see” posture, weighing whether the combined effect of tighter financial conditions risk stalling the broader economy.

Looking further ahead, the US current account deficit may narrow, but potentially at the cost of weaker long-term growth and more persistent inflation, driven by labour market rigidity and reduced foreign direct investment. Ultimately, this may lead to continued steepening of the US Treasury yield curve.

Chart of the Week: Slumping support for Brexit

Source: YouGov, Public support for Brexit, as of January 28, 2025. For illustrative purposes only.

Past performance is not a reliable indicator of current or future results.

References

[1] Franklin D. Roosevelt Presidential Library and Museum, ‘FDR’s first 100 days,’ as of May 2025
[2] US Office of the Historian, ‘The Bay of Pigs Invasion and its Aftermath,’ as of May 2025
[3] The New York Times, ‘Reagan’s first 100 days,’ April 26, 1981
[4] National Archives, First 100 days report,’ April 21, 2009
[5] The American Presidency Project, ‘Biden in Action: the first 100 days,’ April 26, 2021
[6] Bureau of Economic Analysis, ‘GDP Q1, 2025,’ April 30, 2025
[7] Macdonald’s Corporation, Q1, 2025 Results, May 1, 2025
[8] Bloomberg, ‘McDonald’s sales miss highlights rising consumer anxiety,’ May 1, 2025
[9] Bloomberg, World Interest Rate Probabilities, as of May 2, 2025
[10] Reuters, ‘Factbox: Donald Trump in his own words on Brexit, Britain and Boris,’ June 3, 2019
[11] European Commission, ‘The EU-UK Trade and Cooperation Agreement,’ April 30, 2021
[12] Office for Budget Responsibility, Brexit analysis, as of May 2025
[13] CEPR, ‘Brexit inflation: The role of trade policy uncertainty in increasing UK import prices,’ December 22, 2023
[14] BBC News, ‘UK election: What's happened and what comes next?’ July 4, 2024
[15] YouGov, ‘How do Britons feel about Brexit five years on?’ January 28, 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of May 2, 2025, and may change without notice. All data figures are from Bloomberg, as of May 2, 2025, unless otherwise stated.

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