RECAPPING LAST WEEK

U.S. equity indices posted mixed performance as investors weighed optimism around trade negotiations against an uncertain outlook from the Federal Reserve. The S&P500 and Nasdaq Composite indices fell marginally, while the Russell 2000 finished slightly positive. S&P500 sector returns were also varied but healthcare slumped more than 4%, pressured by the potential impact of pharmaceutical tariffs. Cryptocurrencies benefitted from investors’ increased risk appetite, with Bitcoin jumping 6% to near $104,000 per coin, while Ethereum soared by a whopping 26%. Crude oil prices recovered from a sharp drop on Monday to finish higher by more than 4%, back above $60 per barrel. Gold futures surged early in the week before pulling back, settling for a 2.6% gain.

U.S. Treasury yields rose after mixed auction results and the Fed’s decision to leave short-term rates unchanged. While the 10-year auction saw strong demand, 30-year bonds sold off—sending yields higher—as foreign purchases came in at the lowest percentage of the total since 2019. The FOMC statement said that the U.S. economy has “continued to expand at a solid pace” but the risks of higher inflation and unemployment had risen. Expectations for additional rate cuts have shifted out to July, according to fed funds futures, as the uncertainty from tariffs has clouded the economic outlook. The broad outline of a trade agreement between the U.S. and United Kingdom sparked hopes for future deals, though the way forward for nations with which the U.S. has a large trade deficit remains unclear. Initial meetings with China, which were scheduled over the weekend in Geneva, are seen as the first step in a long process to de-escalate trade tensions.

In other economic news, ISM services PMI increased in April to 51.6 with the prices paid gauge rising to a two-year high of 65.1. Non-farm productivity fell at a 0.8% annualized rate in the first quarter, the first decline since Q2 2022. Unit labor costs jumped at a 5.7% clip, up from 2.0% in the prior period. Overseas, China’s central bank lowered its benchmark interest rate by 10 basis points to 1.40% and cut the reserve requirement for domestic banks by 50 basis points. China’s exports to the U.S. fell by 21% in April, but overall exports still rose 8% YoY as the country shifted sales to Southeast Asia. The Bank of England lowered rates by a quarter point to 4.25% in a much closer than expected 5-4 vote. Finally, Germany avoided the possibility of confidence-shaking political turmoil, electing conservative leader Merz as new chancellor after requiring a second round of
voting. Eurozone investor confidence improved this month as recession fears receded.

THE WEEK AHEAD

With the S&P500 index set to open the week just above the key technical level of its 200-day moving average, investors will be watching to see if risk appetite continues to advance after the initial trade agreement reached over the weekend between the U.S. and China. Further, last week’s FOMC meeting confirmed the Fed is targeting slower demand growth to ensure inflation and associated expectations remain anchored. Fed Chair Powell was explicitly clear that the FOMC cannot preemptively cut rates with inflation above target and tariffs putting upward pressure on prices.

On the data front, the main domestic economic releases to watch this week will be April’s CPI and retail sales figures, along with the May preliminary consumer sentiment reading and inflation expectations. The consumer inflation release on Tuesday will be scrutinized for any confirmation of rising price trends seen in the recent PMI data. Thursday’s retail sales report is expected to be flat after surging the prior month, and industry giant Walmart will report earnings that same morning.

Other items on the U.S. agenda include the Empire State and Philly Fed manufacturing indices, industrial production numbers, and housing starts and building permits. Powell is scheduled to speak at a conference on Thursday morning. The international economic calendar is quiet this week, but escalating aggressions between nuclear powers India and Pakistan have that region on high alert. Monthly employment and GDP updates in the UK may attract some attention, while Japan will release Q1 GDP, monthly PPI, and the Bank of Japan’s Summary of Opinions from their recent meeting.

(Schwab)