RECAPPING LAST WEEK

U.S. equity indices remained under pressure, held captive by trade war drama, geopolitical
tensions, and federal budget wrangling. The S&P500 and Nasdaq Composite fell more than 2% despite a strong relief rally into the weekend, while the Russell 2000 slid 1.5%. At Thursday’s lows, the S&P500 had fallen into correction territory, down more than 10% from the record high reached less than one month ago. Gold futures rose above $3,000 per ounce for the first time, driven by the various macroeconomic dislocations triggered by global economic uncertainty.

Eight of eleven S&P500 sectors lost ground with discretionary and staples each sinking more than 4%—reflecting concerns over domestic consumption trends. Although February’s U.S. CPI and PPI reports showed a slight moderation in price increases, the anticipated inflationary effects of tariffs continued to weigh heavily on sentiment. One-year inflation expectations soared to an annual rate of 4.9% in March’s preliminary consumer sentiment report, while the sentiment index itself plunged to 57.9, the lowest since November 2022. Long-term inflation expectations rose to 3.9%, the highest level since 1993. At week’s end, investors had little clarity whether the most recent tariff threats against the European Union would end up as policy. U.S. Treasury yields ended slightly lower after rising earlier in the week.

Meanwhile, it appeared that a U.S. government shutdown may be averted after the House of Representatives approved a budget measure on Thursday. On the international front, Russia supported in principle a U.S. proposal for a ceasefire in Ukraine, but numerous caveats from the Russian President suggested that negotiations would take some time. German Chancellor-in-waiting Merz announced that he had secured political backing for a massive increase in government borrowing, clearing the first hurdle for the development of enormous defense and infrastructure spending. Former central banker Mark Carney won a landslide victory to lead Canada’s Liberal Party and become the country’s next Prime Minister with a general election likely soon to follow. The Bank of Canada cut its benchmark interest rate by 25 basis points to 2.75%, warning that the trade conflict with the U.S. could cause severe economic impact and that any further cuts will depend on inflation expectations. Finally, China’s stock indices rallied Friday on hopes for more policy support. An upcoming press conference on measures to boost consumption will include officials from several government bodies. China’s most recent consumer inflation figures showed a monthly and yearly decline for the first time in over a year.

THE WEEK AHEAD

Central banks may regain some of the spotlight this week amid the trade war turmoil, with
interest rate decisions due in the U.S., Japan, and the UK. However, macroeconomic concerns remain at the forefront, as investors grapple with stagflation risks due to the U.S. administration’s isolationist economic policies. For the Federal Reserve, sticky inflation and labor market resiliency will likely keep the bar high for the next rate cut, which isn’t expected until June at the earliest.

Wednesday’s FOMC statement will include updated economic projections and a new dot plot. Keep an eye out Tuesday for the Atlanta Fed’s latest Q1 GDP estimate—which could be heavily influenced by Monday’s U.S. retail sales report. The domestic economic calendar also features housing data, regional manufacturing surveys, and industrial production figures. Overseas, the Bank of England is also expected to keep interest rates unchanged on Thursday despite a disappointing GDP release last week. The UK’s labor market update for January precedes the BoE statement. Japan’s central bank decision arrives Tuesday evening. Wage growth and consumer prices continue to trend higher, but investors aren’t anticipating another BOJ rate hike until at least July. Japan’s latest national CPI reading arrives later in the week. Last of all, China was scheduled to release industrial production and retail sales figures on Sunday evening.

(Schwab)