Macro
It was a relatively light economic calendar this week. U.S. retail sales rose 1.4% in March, the most substantial gain since January 2023, driven largely by a surge in auto purchases likely accelerated by impending tariffs. However, control group sales disappointed, and the boost is seen as temporary.
Other data showed mixed signals: housing starts dropped 11.4% to an eight-month low, and industrial production declined 0.3%, weighed down by a sharp fall in utility output. Meanwhile, the NY Fed survey revealed rising short-term inflation expectations and growing concerns about future unemployment, reflecting cautious consumer sentiment despite solid near-term spending.
Abroad, Europe’s equity markets posted gains thanks in part to the ECB’s rate cut, though confidence indicators, particularly in Germany, dropped sharply. China surprised to the upside with Q1 GDP growth of 5.4% and strong March export and industrial production figures, likely boosted by pre-tariff demand. However, geopolitical risks remain elevated. Tensions in Ukraine and Iran continue, while China’s new export controls on rare earths have escalated the trade conflict with Washington. Markets are now bracing for next week’s IMF and World Bank Spring Meetings, where trade, inflation, and geopolitical fragmentation are expected to dominate discussions.
Long-term corporate investments in R&D and capital assets like property, plant, and equipment typically span 7 to 10 years and require a stable regulatory and trade environment to forecast returns accurately. However, recent shifts in U.S. economic policy—particularly the Trump administration’s broad-based tariffs—have increased uncertainty. Soaring import prices, especially for goods from China, are squeezing margins and suppressing demand, leading firms to delay investment and shift toward short-term planning horizons.
At the same time, central banks are diverging in their policy responses. The European Central Bank (ECB) has cut rates for the seventh consecutive time, bringing its target to 2.25% to support growth. In contrast, the U.S. Federal Reserve has held its benchmark rate at 4.4% since September, citing inflation risks partly driven by trade-related price increases. These dynamics are colliding with a massive fiscal challenge: the U.S. must refinance $9.2 trillion in debt this year—about 31% of GDP—with 70% of it maturing by midyear. As borrowing needs surge and inflationary pressures rise, yields have climbed, increasing the cost of servicing debt.
Concerns over the U.S. dollar’s stability are also gaining traction. Treasury Secretary Janet Yellen recently warned that escalating political and trade tensions are undermining trust in dollar-denominated assets. Foreign investors currently hold around one-third of U.S. public debt, led by Japan and China, making confidence in U.S. policy critical. With strained global relations and rising domestic uncertainty, the sustainability of U.S. financial leadership may increasingly be called into question.
As President Trump pushes for lower interest rates, he has openly expressed frustration with current monetary policy, accusing Federal Reserve Chairman Jerome Powell of “playing politics” and advocating for rate cuts. In response, Powell criticized Trump’s tariff policies, warning they would significantly raise inflationary pressures and slow economic growth—while notably omitting any discussion of their potential strategic benefits.
When addressing inflation, Powell also avoided referencing the unprecedented level of fiscal stimulus enacted under President Biden, particularly the $1.9 trillion American Rescue Plan passed in 2021. Many economists view this stimulus, implemented amid an economic boom, as a key contributor to recent inflationary pressures.
Critics argue that Powell lacks sufficient insight into Trump’s negotiating strategies and is too quick to cast the President’s economic policies in a negative light. Powell’s own track record has drawn scrutiny, especially his 2019 approach to quantitative tightening and rate hikes, which contributed to a liquidity crunch in the repo market that required a $500 billion intervention by the Fed. His shifting stance—from tightening in 2019, to aggressive stimulus during the post-pandemic bull market of 2020–2021, to an abrupt 50 basis-point rate cut in September 2024 just before the election—has also raised concerns. Bank of America summed up the dynamic in a recent note: “The Fed cut 50bps in September when the stock market was at a record high, and the Atlanta Fed was forecasting +3% US GDP growth; the Fed is now determined not to cut rates after a 20% market plunge, with the Atlanta Fed forecasting -3% GDP growth.”
Despite a slowing economy, Powell and the Federal Reserve remain hesitant to lower rates further, maintaining a restrictive stance. While their caution reflects valid concerns over persistent inflation and geopolitical risks, Trump and his allies view the decision as politically motivated, intensifying the public clash between the President and the Fed Chair. Trump has been vocal in his dissatisfaction and has made clear his desire for Powell’s term to end soon.
Legally, however, the President does not have explicit authority to remove the Fed Chair without cause. Any attempt to do so would likely provoke legal challenges and raise constitutional questions over the central bank’s independence. Historical precedent underscores the risks: in 1984, President Ronald Reagan—whom Trump frequently references and whose campaign slogan he adopted—considered removing Fed Chair Paul Volcker but ultimately refrained, understanding the potential political and economic fallout.
Any move to oust Powell early would almost certainly face bipartisan opposition, erode confidence in the Federal Reserve, unsettle global markets, and risk triggering significant financial volatility. Moreover, with just over a year left in Powell’s term, any legal attempt would likely outlast his tenure, rendering the effort largely symbolic and politically costly.
Meanwhile, despite Trump’s public pressure, market pricing reflects only a 15% probability of a rate cut at the Fed’s May meeting.
In a separate but equally significant development this week, China halted exports of several essential rare earth elements to the United States – including terbium, dysprosium, and yttrium – materials crucial for electric vehicles, wind turbines, and defence applications. The export ban, which follows new U.S. tariffs and restrictions, arises amid escalating trade tensions between the two countries.
Given that China controls roughly 70% of global rare earth mining and nearly 90% of the world’s processing capacity, this move is expected to disrupt global supply chains and drive up prices for these strategic materials. The U.S., which remains heavily dependent on Chinese imports, now faces an increased urgency to develop alternative sources. While domestic efforts, such as MP Materials’ operations in California and Texas, are progressing, they remain insufficient in the short term to fill the gap.
This development underscores a growing strategic weakness in Western economies and highlights the increasing importance of securing critical mineral supply chains amid escalating geopolitical competition.
Rates
Foreign demand for long-dated U.S. Treasuries has softened, with several auctions in 2024 and early 2025 showing weaker bid-to-cover ratios and reduced participation from traditional buyers such as Japan and China. At the same time, yield volatility has increased, reflecting a growing uncertainty regarding fiscal sustainability and geopolitical risk.
If Trump’s tariff-heavy, unilateral policy triggers retaliatory measures and threatens long-term growth prospects, investors may question whether U.S. bonds can continue to serve their historic role in their portfolios.
Equities
President Trump’s April 2 announcement of the largest import tax package in over a century triggered the sharpest declines in both equity and bond markets since the 2008 financial crisis. At its worst, the S&P 500 lost nearly $6 trillion in market value before a 90-day pause on most tariffs (excluding China) provided temporary relief.
Markets staged a violent rebound, with the S&P 500 surging nearly 10% in a single day following the tariff pause. Such large daily moves have only occurred a handful of times over the last 40 years—specifically after the 1987 crash, the 2008 GFC, and the 2020 COVID sell-off.
Despite this bounce, the S&P 500 experienced a fierce correction in recent weeks, falling 10% over 20 trading days, marking the fifth-fastest drop since 1950, often referred to as a “waterfall” or “rage” sale. Historically, such moves, particularly during the COVID era, have been followed by further downside. Technically, the index has now crossed the “death cross,” with the 50-day moving average falling below the 200-day average.
Looking to historical trends, in the 28 years out of the last 104 when Q1 ended in negative territory, the rest of the year (Q2–Q4) saw a modest +2.2% average return. This compares to a much stronger +9.3% average for years with a positive Q1. It’s also important to note that the year began with extremely bullish sentiment and marked the second-best two-year back-to-back return stretch for the S&P 500 on record. Valuations were elevated after two years of expansion, and optimism around artificial intelligence had fueled further gains.
In a rare February 26 interview, Paul Singer, founder of Elliott Management, called current market conditions “as risky as I have ever seen,” warning that the practical value of AI is “way exaggerated” and likening current hype to past speculative bubbles. He is not alone, back in December, the Chicago Fed’s National Financial Conditions Index showed financial conditions were as loose as they were during the 2021 speculative frenzy.
This past Monday, the S&P 500 opened higher, though with less momentum than expected. The broader market is now sending mixed signals: rising Treasury yields and gold prices, falling tech stocks and oil, and a weakening U.S. dollar. Amid this uncertainty, investors are piling into gold, with record inflows of $8 billion in a single week, double the previous $4 billion pandemic-era peak. This surge has pushed gold up 29% year-to-date, its best performance since 1974. The dollar price hit a record $3,350/oz, driven in part by strong Chinese demand—China added 5 tonnes of gold in March, bringing total reserves to 2,292 tonnes (6.5% of its official reserve assets).
Interestingly, the S&P 500 has shown a correlation with G7 currencies, hinting that the recent decline may be tied to capital outflows from U.S. assets. According to Bank of America’s Global Fund Manager Survey, nearly half of institutional investors now plan to reduce exposure to U.S. equities—an all-time high. Allocations to U.S. stocks dropped sharply to levels last seen during the March 2023 banking crisis. The two-month reduction is the largest ever recorded in the survey’s history. Investor sentiment has plummeted, with 82% expecting global economic deterioration, and overall sentiment registering its fourth-lowest level since 2008.
A sharp rise in EPS estimates by major strategists at the end of last year—well ahead of price action—reflects excessive optimism, a typical feature of market tops. Interestingly, this surge in expectations followed the departures of two high-profile bearish analysts: Mike Wilson (Morgan Stanley) and Marko Kolanovic (JPMorgan). Their exits cleared the path for more bullish voices to dominate at top firms, reinforcing the upward revision cycle.
So far, the current bear market has lasted 242 days since the last significant low. The average bear market spans roughly 400 days. Given the shallower gains during the preceding rally, fewer days may be needed to reverse the trend. However, if one expects the market to have bottomed and a recession looms, it’s worth remembering that typical short drawdowns are accompanied by immediate policy stimulus, which is notably absent today.
What’s unusual is the absence of a strong dollar during this correction. The dollar has dropped 8.2% YTD. Just months ago, U.S. assets traded at a premium tied to “U.S. exceptionalism.” That narrative has now shifted toward “U.S. political uncertainty,” raising concerns among global investors. Indeed, some commentators are now questioning whether we are witnessing the end of U.S. exceptionalism. Investor fears aren’t just about the tariffs themselves, but about how poorly they were communicated. The lack of detail and engagement with global partners has deepened macroeconomic pessimism.
Retail sentiment is at historic lows. According to the AAII sentiment survey, 59% of individual investors expect stock prices to fall over the next six months, down only slightly from 61.9% the week prior. These levels rival peak pessimism during the 2008 crisis and 2022 lows. Notably, bearish sentiment has remained above 55% for seven consecutive weeks—the longest stretch since at least 1990.
From a technical standpoint, the S&P 500 reached a peak of 5,669 before the tariffs and fell to a low of 4,835 on April 7. It has since rebounded to 5,295, leaving approximately 4% upside to the 5,500 resistance level.
For investors anticipating a recession, Walmart stands out, it has outperformed the S&P 500 during each of the last six U.S. recessions (though not necessarily with positive returns). Meanwhile, volatility indicators signal a potential bottom. The Cboe Volatility Index (VIX) dropped more than 7 points this week even as equities declined—an extremely rare divergence last seen on April 3, 2020, just after the COVID market bottom. Volatility-targeting strategies have also fully de-risked, a condition often associated with market troughs where there is no one left to sell.
A striking example of the current sentiment washout is the latest cover of The Economist, capturing the dramatic shift in tone on the U.S. economy – from Boom to Gloom, in just six months.
One underappreciated factor is the magnitude of foreign ownership in U.S. equities. Since COVID, foreign holdings have surged by $6 trillion, reaching $16 trillion at the end of 2024. Over the same period, foreign holdings of U.S. Treasuries grew by only $1.5 trillion to $8.5 trillion—suggesting that U.S. equities, not bonds, have been the main attractor of global capital. Whether this support persists amid rising geopolitical and policy uncertainty remains an open question.