RECAPPING LAST WEEK
Despite the lack of a clear off ramp to the war in Iran, U.S. equity indices rallied sharply in volatile
trading, posting their first weekly gain since the conflict began. The Nasdaq Composite index
jumped nearly 4.5%, while the S&P500 and Russell 2000 each rose more than 3%. Crude oil
futures surged by 11.5% on Thursday after President Trump vowed to strike Iran more
aggressively, while Iran’s armed forces warned the U.S. and Israel of further retaliatory attacks in
response. In contrast to stocks, which reversed from steep losses at Thursday’s open, oil was little
moved by reports of Iran working with Oman to develop a collaborative framework to monitor
traffic in the Strait of Hormuz. Ten of eleven U.S. sectors finished higher, with energy (–5.3%) the
sole loser even as oil prices climbed. Gold and silver faded at week’s end, but each gained around
4%. U.S. Treasury yields eased as investors priced in the increasing likelihood of a global
economic slowdown triggered by the war in the Middle East. Fed Chair Powell’s comments also
contributed to the fall in yields—he said the central bank has little control over supply shocks that
might be caused by the surge in oil prices, but that longer–term inflation expectations are not yet
rising. Last week’s economic data suggested that the U.S. remains on solid footing—for now.
March’s non–farm payrolls, released on Friday while U.S. equity markets were closed, rebounded
more than expected with 178,000 jobs added. The unemployment rate fell to 4.3%. Other labor
market data presented a mixed picture: private payrolls rose by 62,000, while job openings fell
more than forecast and hiring dropped to the lowest level in six years. Layoffs at technology
companies continued to increase, with artificial intelligence advancements cited as a main driver.
The Commerce Department continued to catch up on data delayed by last year’s government
shutdown, announcing that U.S. retail sales increased 0.6% in February. ISM manufacturing PMI
lifted to 52.7 in March, the highest reading since August 2022. Part of the rise was due to
increasing delivery times, which typically occur in a strong economy but in the current
environment may indicate supply chain disruptions. The prices paid measurement jumped to 78.3
from 70.5. The Conference Board’s consumer confidence indicator, which generally focuses on
labor market conditions rather than the cost of living, rose to 91.8 last month. Overseas, some 40
countries were engaged in virtual talks on Thursday, exploring ways to restore navigation in the
Strait of Hormuz. Eurozone inflation spiked to 2.5% YoY in March, up from 1.9%. The rise was
almost entirely due to rising energy prices. Manufacturers faced soaring input costs and supply
chain disruptions, forcing them to raise prices. Germany’s top economic institutes cut their growth
forecasts for this year and next and raised inflation projections. In Japan, core consumer prices in
the country’s capital rose 1.7% YoY in March, a figure analysts expected to rise in the coming
months. Japanese manufacturers expressed their highest level of optimism in more than four
years, according to the Tankan survey. Finally, China’s official PMI surveys rose more than
expected last month as production and new orders expanded.
THE WEEK AHEAD
Oil prices will remain the focus as investors struggle to process conflicting signals of when the
Middle East conflict could wind down. OPEC+ was expected to consider additional oil output
increases when it met on Sunday, but any action would have little impact on supply until the Strait
of Hormuz is opened. In the U.S., Friday’s CPI report for March will be an important gauge of how
the war’s energy shock is impacting the economy. While it may be too early to reflect any broader
inflationary impact, the headline reading is expected to have jumped a whopping 1.0% MoM. Any
upside surprises could further rattle fragile stock and bond markets. The PCE Core Price index will
be released on Thursday, but that will be February’s delayed data. The rest of the domestic
calendar includes ISM services PMI, minutes from the last FOMC meeting, 10– and 30–year
Treasury auctions, and April’s preliminary consumer sentiment reading and inflation expectations.
Developments in the private credit markets will likely remain in the headlines. Asset management
companies were under pressure last week after Blue Owl limited redemptions in response to
investors asking to withdraw 40.7% of shares in one private credit fund and 21.9% in another. The
Treasury Department was expected to announce meetings with domestic and international
insurance regulators to discuss transparency and lending practices in the industry.
The international economic calendar features Eurozone PPI and retail sales figures, German
industrial production and factory orders, and China’s monthly inflation update.
(Schwab)
