RECAPPING LAST WEEK
U.S. equity indices sold off sharply at week’s end amid little tangible progress toward ending the
war in Iran. The Nasdaq Composite index lost more than 3% while the S&P500 slid 2%. The
Russell 2000 fared better, rising marginally. Oil prices continued to drive the narrative: after
plunging Monday on hopes for negotiations and de–escalation in the Middle East, crude and Brent
futures steadily clawed back losses to finish higher for the week. U.S. sector performance was
mixed, with sharp gains in energy (+5%) and basic materials (+4%) offset by weakness in
technology (–4%) and communications (–4.5%). The latter were dragged down after Meta and
Alphabet were found liable for social media addiction in two separate trials. Rising energy costs
pushed the inflation narrative, sending U.S. Treasury yields to eight–month highs. The 10–year
note yield jumped as high as 4.48%, up nearly 50 basis points in this month alone. Relatively poor
demand at a trio of short– to intermediate–term Treasury auctions also pressured bond prices and
contributed to the rise in yields. U.S. mortgage rates rose for a third straight week, with the 30–
year contract lifting to 6.43%. Despite President Trump extending the deadline for Iran to reopen
the Strait of Hormuz to April 6 and unconfirmed reports of talks between the countries, investors
were skeptical and the Cboe Volatility index (VIX) spiked back above 30. Federal Reserve officials
expressed growing concern over the economic outlook and inflation impacts. Turning to economic
data, the costs of war started to become evident in this month’s S&P Global Flash PMI surveys.
U.S. business activity stayed in expansion territory but slowed to an 11–month low, while prices
paid for inputs and output prices charged to consumers both rose. U.S. import prices increased
0.5% MoM in February, the largest jump in nearly four years. The final reading of consumer
sentiment for March dropped to 53.3 and one–year inflation expectations rose to 3.8% from 3.4%
in the initial estimate. Overseas, private sector growth in the UK and Eurozone stalled this month
as manufacturers’ input costs surged, leading them to raise prices at the fastest pace in nearly a
year. ECB President Lagarde warned that the central bank could respond “forcefully” should
inflation appear likely to persist above the 2% target for an extended period. The Bank of Japan
released a new measure of its core consumer price index that showed a 2.2% YoY rise in
February. Minutes from the central bank’s January meeting revealed a hawkish bias even before
the Iran war jolted oil prices. Finally, China started multiple investigations into U.S. trade practices
in response to similar inquiries initiated by the U.S. earlier this month.
THE WEEK AHEAD
A rough first quarter draws to a close this week, with the S&P500 down about 7% thus far.
Disruptions from artificial intelligence and concerns about the private credit markets, on top of
the Iran conflict, have rattled investors after three straight years of solid gains. March’s non–farm
payrolls will be released on Good Friday even as U.S. markets are closed for the holiday.
Expectations are for a rebound of 50,000 jobs created after the prior month’s shocking decline of
92,000. Even if the labor market deteriorates further, surging energy prices have shifted the Fed’s
focus from employment towards re–emerging inflation pressures. Fed funds futures are no longer
pricing in any rate cuts this year and suggest a modest chance of a hike. The JOLTS job openings,
Challenger job cuts, and ADP private payrolls reports will be released earlier in the week. Other
data points on the domestic calendar include ISM manufacturing PMI, retail sales, and consumer
confidence. On the international side, central banks in Europe and the UK may be forced to raise
rates several times this year to fight energy price shocks, given that they are highly dependent on
oil and gas exports from the Middle East. Germany and the wider Eurozone will release February’s
pre–war inflation data early in the week. Japan, another country very reliant on Middle Eastern
energy products, reports preliminary March CPI figures from the Tokyo district on Monday evening.
(Schwab)
