Macro
U.S. consumer confidence, based on data collected before the recent US-China trade negotiations, has dropped to the second-lowest level on record. Meanwhile, the University of Michigan’s survey shows the 1-year inflation outlook spiking to 7.3%—a level not seen since the 1980s. However, it’s worth noting that survey-based data has become increasingly volatile and less reliable in the post-pandemic era. Despite elevated yields in the 4–5% range, the U.S. economy has shown resilience and continued to grow, which has contributed to upward pressure on interest rates. Looking ahead, the likely outcome of ongoing trade negotiations may result in a tariff structure of around 30% on Chinese goods and 10% on imports from other countries.
Rates
Yields continued to climb this week, with the 30-year approaching the 5% mark. U.S. Treasury yields remain at a critical juncture, and this deep, highly liquid market will ultimately serve as a key gauge of the broader economic outlook. While the Federal Reserve is facing criticism for its caution, it is likely to hold off on policy changes for as long as possible. Meanwhile, Capitol Hill’s persistent lack of fiscal discipline, reflected in deficits running at 6–8% of GDP, continues to exert upward pressure on the long end of the yield curve, even as the front end declines in anticipation of future Fed cuts. This dynamic supports a continued yield curve steepening, as noted last week.
Importantly, the U.S. is not alone in its fiscal expansion; most developed economies have seen their debt-to-GDP ratios climb toward 100% over the past three decades. Nevertheless, U.S. debt still appears relatively sustainable, supported by key structural advantages: reserve currency status, a resilient and innovative economy, energy independence, a broad tax base, and vast under-monetized assets like land and natural resources.
Credit
Post-‘Liberation Day’ volatility underscored the resilience of the U.S. credit market. Despite sharp swings in the equity market, credit markets experienced orderly and normalized selling. Following the temporary pause in tariffs, credit spreads quickly stabilized, returning to pre-‘Liberation Day’ levels.
While investors remain mindful of macroeconomic uncertainty, they continue to express confidence in the U.S. economy’s resilience, which is evident in sustained credit inflows over the past three weeks. Investment-grade (IG) spreads have narrowed from an April peak of around 120 basis points to 90 bps, while high-yield (HY) spreads have tightened from nearly 450 to 310 bps. Although spreads are no longer exceptionally wide, they remain more attractive than the ultra-tight levels seen at the end of last year. Combined with higher interest rates, this offers appealing all-in yields.
US corporations are entering this evolving tariff landscape from a position of relative strength. Many are still working through pre-tariff inventories, which means that the full impact of duties will take time to materialise. The effects will vary significantly by sector, depending on each industry’s fundamentals, pricing power, and ability to maintain profit margins.
Equities
Institutional investors remain sceptical as mounting signs of economic stress clash with the momentum of what many call an “unloved bull market.” Clients frequently cite persistent uncertainty and question the durability of the current six-week rally. While many have covered shorts and selectively added to long positions, they remain cautious, as evidenced by hedge funds’ net leverage staying below historical averages. What’s clear is that it is becoming increasingly difficult to identify the next catalyst that could meaningfully drive equities higher.
Investors are attempting to concentrate on the short-term horizon, anticipating bad news in the upcoming months. However, equity markets do not rely on current headlines—they anticipate the future. With over $7 trillion in cash still on the sidelines and sentiment remaining profoundly negative, equities do not require good news to ascend. The market merely needs uncertainty to stabilise, providing investors with a reason to reevaluate their bearish stance.
Therefore, despite macro headwinds, technical indicators have offered reasons for optimism. Four weeks ago, I flagged the ‘extremely likely’ market bottom based on a range of signals—most notably, the market had recovered over 50% of its losses, a level that historically marked durable turnarounds in 21 out of 22 prior drawdowns of 20% or more. Additionally, we saw a powerful breadth thrust: two consecutive days where over 90% of S&P 500 constituents posted gains – a rare and bullish signal. The current rally marks the fastest snapback since 1982, and the tone among analysts has shifted dramatically, with growing calls for new all-time highs.
April’s economic data reinforces this cautious tone. Retail sales have lost momentum, debt delinquencies have reached a five-year high, and consumer confidence has dropped to its second-lowest reading on record, even as near-term inflation expectations have eased in the bond market. Meanwhile, corporate profit margins are under pressure. Retailers and wholesalers experienced significant margin declines in April, indicating that many businesses are absorbing costs rather than passing them on. However, this strategy has limits. For example, Walmart signalled that price increases are imminent as pre-tariff inventory runs out. More broadly, firms are prudently preparing for a range of outcomes, and investors are rewarding companies with minimal tariff exposure and strong secular growth prospects.