Macro
Inflation is moderating, yet consumer anxiety persists, raising long-term inflation expectations. While tariffs typically have negative implications for both growth and inflation, analysts are currently placing greater emphasis on potential impacts on economic growth. Increased concern about an economic slowdown is prompting analysts to raise their recession forecasts.
The Federal debt to GDP ratio is close to 1:1, and the US is running a deficit of 7% of GDP, while the economy is only growing at 2 to 3%. Therefore, the debt growth outpaces the economy and adds a liability of 4 to 5% of the value of the entire US economy each year. There is, therefore, a tremendous need for fiscal consolidation and aligning spending closely with the revenues. Treasury Secretary Scott Bessant wants to get the debt to GDP from 7% to 3% over the next 4 years while simultaneously pushing the US economy on the long-term growth path of 3%. In other words, the abortion of the US administration is to align spending and revenues as well as significantly boost US growth, all within Trump’s second term.
The US also is trying to boost the energy production, create boost of productivity and unlish the animal spirit through deregulation, and boos domestic production through tariffs and incentives for domestic manufacturers. Problem is that deregulation cannot be done through executive process, but must be unwind through painstakingly slow legislative process that relies on support from the opposition. Furthermore, the reorganisation of the supply chain is a multi-year effort, done against the backdrop of the retaliatory tariffs that hurt domestic production.
Consumer sentiment remains weak as long-term inflation expectations hit a 32-year high despite recent CPI and PCE data moderation. Persistently high inflation continues to elevate consumers’ expectations, notably driven by rising costs of frequently purchased items such as food and gasoline, highlighted by the recent surge in egg prices (“Eggflation”).
Current economic data remains relatively strong, projecting around 2% GDP growth for the U.S. this year. Nevertheless, consumer and business sentiment indicators are noticeably weaker, reflecting underlying uncertainty. The broader economy’s true resilience in the face of tariffs and potential austerity measures remains uncertain and will require close monitoring.
Investors’ concerns have notably shifted from inflation to growth—a transition less favourable for markets. Treasury Secretary Bessent’s recent comments suggest the Trump administration remains relatively unconcerned with the recent decline in U.S. equities, implying that current market conditions have not yet reached a threshold that would prompt President Trump to reconsider aggressive trade policies.
Amid increased market volatility, speculation has risen regarding how significant stock market declines would need to be before President Trump moderates trade threats. With the S&P 500 over 6% off recent highs, Bessent indicated this threshold has not yet been met.
This week, the market continued its risk-off stance, driven primarily by macroeconomic uncertainties and intensified trade tensions. Despite oversold conditions, caution deepened in response to President Trump’s aggressive tariff actions, notably the threat of imposing a 200% tariff on EU alcohol. The newly activated 25% tariffs on Canadian aluminium and steel, along with reciprocal measures from Canada and the EU and anticipated announcements of additional tariffs on April 2nd, further intensified anxieties. Strategists now highlight risks to economic growth and earnings, causing investors to prefer selling rallies over buying dips.
Even favourable inflation data, including lower-than-expected CPI and PPI figures for February, failed to shift market sentiment positively. Although sectors such as airline fares, vehicle prices, and food services saw price declines, apparel prices increased modestly. Jobless claims slightly improved, and January’s job openings exceeded expectations, but consumer sentiment dropped to its lowest point since November 2022.
In Washington, policymakers made progress in avoiding an immediate government shutdown by passing a continuing resolution in the House to fund government operations through September 30th. Despite some uncertainty, the Senate is expected to approve the measure. Meanwhile, geopolitical tensions eased slightly as Russia expressed preliminary support for a 30-day ceasefire in Ukraine, though substantial negotiations remain necessary.
This week’s positive developments included easing trade tensions between the U.S. and Canada following constructive discussions, policy-driven gains in Chinese markets, stable Q1 spending trends indicated by Visa and Mastercard, and observations from JPMorgan suggesting credit markets currently see lower recession risks than equity and rate markets.
This year’s narrative has focused on downward revisions in growth expectations. Both consumers and corporations are adopting a cautious “wait and see” approach, awaiting more precise economic signals, with sentiment broadly trending downward.
China’s consumer prices declined by 0.7% year-on-year in February, highlighting persistent disinflationary pressures and complicating Beijing’s efforts to stimulate domestic demand amid escalating trade tensions with the U.S. Despite recent stimulus measures and a revised inflation target of around 2%—the lowest in decades—economists remain cautious, pointing to the ongoing housing slump, weakening exports, and excess industrial capacity as key obstacles. Officials acknowledged these challenges and pledged additional stimulus if needed. However, analysts suggest deflationary pressures may continue through at least the first half of the year, risking a prolonged period of economic stagnation similar to Japan’s experience in the 1990s.
For the next week, all eyes are on Wednesday’s FOMC meeting, where the most likely outcome is that the FED will keep the rates steady. Similarly to the September 2024 meeting, they are running the risk of cutting too soon again. What’s more interesting is their growth outlook, given all the buildup of macro uncertainties and negative sentiment.
Rates
Government funding costs recently diverged across major economies. In the US and Canada, borrowing rates declined, with the US Treasury issuing 10-year bonds at 4.31% (down from 4.63%) and 30-year bonds at 4.62% (down from 4.75%). Similarly, Canada’s five-year bond yield fell to 2.77% (previously 2.85%), influenced partly by a recent rate cut from the Bank of Canada. In contrast, Germany and Japan faced rising costs: Germany’s 10-year yield rose to 2.92% (up from 2.52%), and Japan’s 20-year yield increased to 2.28% (up from 2.03%).
US bond market activity was subdued last week, with Treasury yields showing little movement. Treasury yields remained largely unchanged this week, with the two-year note stable around 4.01%, the 10-year holding near 4.31%, and the 30-year slightly higher at 4.61%. Compared to two weeks earlier, when yields were 4.07% (two-year), 4.27% (10-year), and 4.55% (30-year), these stable to slightly higher yields suggest continued investor preference for quality and safety amid market uncertainty.
Bond market volatility has sharply increased, nearly matching equity volatility levels, making bonds relatively more attractive due to rising growth concerns and negative correlations during recent equity sell-offs. With investors now paying higher premiums for protection, bonds are appealing, offering relatively high real yields. Since late 2023, the 10-year yield has fluctuated around 4.5% with wide deviations of approximately 50 bps, creating at least three distinct opportunities for income-focused investors to lock in yields well above the 4.5% benchmark.
On Friday, Fed funds futures priced in 2.6 rate cuts, down from over three at the beginning of the week. Inflation has proven stickier than expected and is now further impacted by tariffs. Consequently, the Fed may be less inclined to cut rates unless recession signals strengthen significantly. The Fed might remain on hold for now, with the 2-year yield already trading 35 basis points below the Fed funds rate. This suggests the short end of the curve could stay around current levels, while the longer end may decline further, pricing in increased uncertainty and a lower growth outlook—both factors resulting in a flatter yield curve. Until recently, the curve has been steepening with a 10Y/2Y spread currently at around 30 bps.
This week, the dollar index slightly declined by 0.1%, Bitcoin futures dropped 2.7%, and gold surged 2.9%, surpassing $3,000 per ounce for the first time. WTI crude fell 0.7%, marking its eighth consecutive weekly drop, the longest losing stretch since 2015.
Credit
With recent volatility, US credit spreads have widened to their highest level since September. Over the past month, investment-grade (IG) spreads have increased from 75 bps to 97 bps, while high-yield (HY) spreads rose from 260 bps to 335 bps. We will likely see further adjustments in spread levels to reflect the new reality of increased macroeconomic volatility.
Treasuries currently offer yields between 4.25% and 4.5% amid an outlook of cyclical deterioration so that credit markets might face slightly higher pressure. The new US administration is also reshaping political dynamics through global negotiations, tariff adjustments, and governmental restructuring, contributing further to uncertainty.
In the current environment, quality takes precedence over yield. Investors are shifting their focus upward toward higher-quality credit. Initially, there was an impression that lower-quality bonds could benefit from anticipated interest rate cuts, potentially reducing their debt servicing costs. However, given the increasing downside risks to economic growth and the Federal Reserve’s cautious “wait and see” stance, lower-rated credits may experience greater pressure than previously expected.
Currently, high-quality credit yields between 4% and 5.5%, while lower-quality credit offers yields between 6% and 8%, creating a compelling equity substitute. Technical factors remain supportive, driven by attractive total yields and robust demand. However, macroeconomic conditions continue to pose the most significant risk to credit investors.
Additionally, corporates might postpone new issuance under current market conditions. Consequently, the existing high demand should serve as a stabilizing force, helping to absorb some volatility as investors shift their focus to the secondary market.
Equities
U.S. stocks ended the week lower, with the S&P 500 entering correction territory after declining over 10% from its February 19 peak. The sell-off was widespread, with the equal-weighted S&P seeing similar losses. Although big tech faced pressure, certain companies improved compared to last week, notably Netflix (+3.0%) and Nvidia (+7.9%). The weakest sectors included cosmetics, interactive media, homebuilders, casual dining, and department stores, with Kohl’s dropping 34.0%.
Sector-wise, performance has been mixed: Energy (+2.57%), Utilities (+1.91%), Materials (+2.21%), Tech (+2.06%), and Financials (+1.25%) led gains, whereas Consumer Staples (-4.26%), Consumer Discretionary (-3.65%), Communication Services (-3.53%), Healthcare (-2.96%), Real Estate (-2.62%), and Industrials (-2.37%) lagged.
When markets drop sharply from their recent highs, it indicates pricing reflects crisis-level anxiety. Investors seem eager to exit ahead of the scheduled April 2 tariffs. Yet, a resolution to these tariffs appears likely before that deadline. Notably, since tariff announcements, markets most directly impacted – such as China, Mexico, and Canada- have outperformed U.S. equities. This suggests markets are pricing uncertainty rather than a full recession.
From a technical perspective, investor sentiment appears heavily oversold, and stocks have recently bounced off critical support levels, hinting at the market’s readiness for a rebound. However, significant medium- and long-term risks remain, keeping investors cautious. Additionally, Democratic investor sentiment has dropped to the lowest level on record, further highlighting the prevailing uncertainty.