RECAPPING LAST WEEK

U.S. equity indices ended a shortened week mostly lower as investors weighed trade policy developments and sobering remarks from Federal Reserve Chair Powell. The S&P500 index fell 1.5%, while the Nasdaq Composite slid 2.5%. The Russell 2000 rose 1% and international stocks rebounded as the U.S. dollar remained under pressure. S&P500 sector performance varied widely—energy and real estate posted gains of more than 3%, while technology and consumer discretionary slumped nearly the same amount.

The semiconductor sub-index tumbled 4% after chip giants Nvidia and Advanced Micro Devices warned of steep charges related to shifting U.S. trade policy. U.S. Treasury yields eased from the prior week’s spike, with the 10-year note dropping 16 basis points to 4.33%. Gold continued to benefit from an uncertain macroeconomic environment, rising another 2.5%, while oil prices rose 3.5% on hopes for easing U.S.-China trade tensions. In a speech delivered Wednesday, Fed Chair Powell reiterated his earlier view that the central bank will not be able to preempt any weakness from trade conflicts, noting that tariffs could challenge the Fed’s dual mandate by pushing inflation higher while weakening growth and
employment. His comments sent risk assets lower, reversing a positive start to the week that was fueled by U.S. exemptions from steep reciprocal tariffs on China for electronics such as smartphones and computer hardware.

Turning to economic data, U.S. retail sales were stronger than expected in March, increasing 1.4% MoM as consumers targeted large purchases such as autos ahead of anticipated tariffs. However, forward-looking sentiment indicators continued to deteriorate. Consumer worries grew over inflation, unemployment, and the stock markets, according to New York Fed survey. Manufacturing surveys from the northeast U.S. reflected softness in new orders and meaningful increases in the prices paid index. U.S. homebuilder confidence remained negative despite a slight retreat in mortgage rates, while housing starts dropped last month by the most in a year. Overseas, the European Central Bank reduced interest rates by a quarter-point to 2.25%, saying that the “outlook for growth has deteriorated owing to rising trade tensions”. The Bank of Canada chose to keep rates steady at 2.75% even as inflation eased to 2.3% YoY last month. CPI in the UK also retreated in March, while signals of a rapidly cooling labor market emerged. Finally, China’s first-quarter growth and March’s retail sales figures exceeded forecasts, but analysts warned of a potential shift in momentum. In response to ongoing trade conflicts, China has essentially halted exports of rare earth minerals and magnets essential to global semiconductor, defense, and auto industries.

THE WEEK AHEAD

Investors may be hopeful that the worst of the tariff-induced turmoil has settled, but with the volatility index still hovering near 30, it’s clear that much remains to be determined. This week will feature more corporate earnings announcements, global flash PMIs, and appearances from FOMC members. In the U.S., particular attention will be paid to the input prices component from Wednesday’s flash manufacturing PMI to see if there are any inflationary impacts from tariffs that began this month.

Alphabet and Tesla are the first of the “Mag 7” companies to report this earnings season along with a host of others like Boeing, IBM, Pepsico, Intel, and Texas Instruments. The rest of the U.S. economic calendar includes new and existing homes sales, durable goods orders, and revised consumer sentiment and inflation expectations. Overseas, the flash PMI figures may reveal if the global economy is poised to enter a period of slower growth.

The International Monetary Fund and World bank meetings start today in Washington, DC. The group will release its projections for global growth and inflation on Tuesday against a backdrop of potential trade disruptions. Japan’s CPI and British retail sales round out the overseas agenda.

(Schwab)