Macro
U.S. employers are projected to add 160,000 jobs in February, with the unemployment rate at 4%. This represents a modest improvement over the 143,000 jobs added in January amid federal government layoffs and a slowdown in consumer spending. The upcoming labor market report will update Federal Reserve officials on current job market momentum.
Core PCE for January came at the lowest annual increase in 4 years. Fed Chair Powell’s Senate testimony signaled no major policy shifts but highlighted ongoing inflation concerns from recent CPI data. Powell stated that President Trump’s remarks won’t influence Fed policy.
As the inflation concerns are ease the tension is moving towards the downside implications for growth. The yields are coming down but for the wrong reasons, as tension related to growth are increasing. As the expectation is that the growth will slow but inflation won’t meet the FED target anytime soon, we have an increased risk of stagflation. Also the initial optimism surrounding the new administration’s economic policy has reversed, causing Treasury yields to retreat. The 10-year Treasury yield currently stands around 4.25%, down from its peak earlier in January.
Concerns over U.S. economic growth intensified as consumer confidence experienced its largest monthly decline since August 2021, driven by growing pessimism about employment conditions. Initial jobless claims notably increased, although continuing claims were lower than anticipated. Average weekly hours worked fell to 34.1 in January, the lowest figure recorded since the COVID-19 pandemic.
January’s core Personal Consumption Expenditures (PCE) inflation met expectations, rising by 0.3% month-over-month and 2.6% year-over-year. However, U.S. spending declined by 20 basis points, marking its steepest monthly drop since February 2021. Historically, monthly spending has turned negative only seven times in the past five years, with three occurrences during the COVID-19 pandemic. Despite this, durable-goods orders exceeded forecasts, driven mainly by transportation. Nonetheless, the Citi Economic Surprise Index has turned negative, and the Atlanta Fed now projects negative GDP growth for the first quarter.
Treasury Chief Bessent expressed confidence that inflation could return to the Federal Reserve’s 2% target within the next six to twelve months, supported by deregulation, increased domestic energy production, and clarity surrounding the extension of the 2017 tax cuts. However, President Trump’s ongoing tariff hikes have heightened concerns that inflation may remain stubbornly elevated, potentially keeping borrowing costs high in the longer term.
The 10-year Treasury yield remains at approximately 4.2%, significantly above the past decade’s average of 2.5%. This elevated yield environment has kept 30-year fixed-rate mortgages above 6%, creating substantial headwinds for the housing market. Pending home sales hit record lows in January, exacerbated by severe winter weather, elevated borrowing costs, and high property prices. Similarly, housing starts have slowed markedly, reflecting builder caution amid rising financing costs and elevated inventory levels.
Bessent anticipates that the housing market will recover in the coming weeks, buoyed by seasonal demand improvements. He reiterated the administration’s commitment to reducing the fiscal deficit, projected to remain above 6% of the GDP for several years. Tariff income was cited as a substantial future offset, with early benefits already materializing. Bessent also highlighted ongoing investigations into federal spending fraud, promising forthcoming disclosures.
DOGE continues its shift toward efficiency by reducing government and quasi-government roles from 85% of payroll creation in February 2024 to the current 70%. Approximately 300,000 government-related jobs are expected to be eliminated this year, potentially weakening future non-farm payroll reports. DOGE is also conducting reviews of government contracts, and based on initial findings, Bessent remarked, “I’m slightly shocked at some of the fraud we’re finding in federal spending, and you’re going to be hearing more about that over the next couple of weeks.”
Internationally, the U.S. faces criticism for prioritizing economic interests, notably leveraging Ukraine’s vulnerable position to secure mineral resources without providing explicit security guarantees. Despite increased European support, Ukraine’s defense capability remains tenuous, heavily reliant on sustained U.S. backing to avoid a dangerous collapse.
Rates
At the week’s close, the 2-year Treasury yield hit 4.00%, with the 5-year, 10-year, and 30-year yields at 4.03%, 4.25%, and 4.53%, respectively. This week’s Treasury auctions totaled USD 183 billion, comfortably absorbed by investor demand across 2-year, 5-year, and 7-year maturities. The dollar rebounded, gaining 0.9% after three consecutive weeks of declines.
Beneficial inflation data triggered a surge in Treasury bonds, making February the strongest month for bonds since July. Bonds significantly outperformed the S&P 500, marking their best relative performance since the 2022 bear market and the second-largest since the pandemic. Specifically, the TLT ETF (tracking 20+ year maturities) rose 5.2% in February, outperforming the S&P 500, which declined by 1.9%.
Within a week, the 10-year yield notably dropped to 4.25% from as high as 4.57%. From January’s high of 4.79%, the 10-year yield has declined by over 50 basis points, indicating significant removal of the inflationary risk premium from the market. 2Y hit 4% flat at the end of the week, with 5Y, 10Y, and 30Y at 4.03%, 4.25% and 4.53%, respectively. This week’s treasury auction was amended to USD 183B, which was easily absorbed by investors buying 2Y, 5Y and 7Y maturities. The dollar rebounded, gaining 0.9% after three losing weeks.
Rising uncertainty could result in reduced consumer spending and further slow economic growth, potentially driving the 10-year yield below 4%. With growth slowing and inflation easing, markets have significantly repriced expectations for Fed rate cuts. Currently, Fed funds futures imply approximately 2.8 rate cuts, compared to just one cut priced in two weeks ago.
Bitcoin slid a lot in the past weeks, hitting a low of $78,225 this Friday, which is 28% below its January 20th ATH of $109,241. This move took the asset below its 200 DMA and, for the first time since September, into oversold condition on 14D RSI. Ethereum also sold off on Friday, down 5% to $2,218. The total cryptocurrency market has erased over $1 trillion since it peaked at $3.72 trillion on December 17.
Rather than being driven by macro uncertainty from Trump’s tariffs, this decline is mainly due to the rapid unwinding of institutional cash-and-carry arbitrage positions. Funds had been buying Bitcoin spot ETFs from firms like BlackRock and Fidelity while shorting CME futures to earn a low-risk yield of about 5.68%, sometimes using leverage for double-digit returns. With over $1.9 billion in Bitcoin sold in the past week and a significant drop in CME open interest, forced liquidations have accelerated the decline. This is evidenced by a $3.3B pullback from US spot-Bitcoin ETFs in February—which in turn has triggered sell-offs in crypto-related stocks like MicroStrategy, Coinbase, Riot Platforms, MARA Holdings, Bit Digital, CleanSpark and Hut.
Credit
The credit markets have been notably active on issuance, marking the second consecutive week of IG debt issuance exceeding $50 billion. February concluded as the second busiest on record, with total issuance reaching USD 161 billion, only behind February 2024’s record of USD 197 billion.
Despite emerging growth concerns in other markets, credit spreads have remained relatively tight. IG and high-yield (HY) credit spreads now stand at 84 and 275 basis points, respectively. Recent minor growth-related worries have widened IG spreads by about 7 bps and HY spreads by approximately 15-20 bps this week. Nonetheless, their prices are higher than last week’s due to a rate decline, offsetting the widening spreads.
Credit markets currently feel expensive, showing remarkable resilience to the significant rate increases experienced over the past three years. This stability primarily stems from strong investor confidence in U.S. consumers, corporations, and the broader economy despite early indications that those are weakening.
The threshold required to trigger sustained widening in credit spreads remains high. Paradoxically, if yields rise after the recent decline, credit spreads could benefit by attracting yield-focused FI buyers into credit, enhancing demand.
In contrast to the volatile treasury market – highlighted by a 50 basis-point decline in 10-year yields since January – high-quality U.S. corporate bonds have emerged as relative havens. Investors have increasingly recognized that improved corporate balance sheets since the pandemic and favorable technical factors make corporate credit an attractive, calmer alternative to Treasuries.
Furthermore, even within high-yield segments, corporate credit quality is improving as companies proactively enhance their financial health, narrowing the quality gap toward investment-grade ratings. Yield differentials of 60 basis between -BBB (lowest investment grade) and +BB (highest speculative grade bonds) reflect that upgrades within the investment-grade space are expected to outpace downgrades. Furthermore, the limited bond availability further supports market stability.
On the leveraged loan side, deal volumes have shifted significantly toward private credit markets. High-yield U.S. corporate debt remains more attractive than emerging market debt, partially supported by “America First” policies boosting U.S. corporations’ competitive advantage. Higher-quality issuers in the high-yield sector continue to find investor support, whereas lower-quality issuers increasingly migrate to private credit markets.
Investors are increasingly considering floating-rate instruments and real assets with inflation hedges, which offer flexibility across various inflation and growth scenarios. Short-term technical volatility has risen recently due to a brief pullback in yield-seeking investors, coinciding with declining yields in the 10-year Treasury. International credit markets, however, may face additional complexities amid ongoing U.S. protectionist policies.
Substantial issuance is anticipated for the upcoming week, with volumes projected over USD 70 billion. Once market participants fully appreciate the resilience of the U.S. economy, sentiment is likely to stabilize further.
Equities
US equities closed mostly lower, with the S&P, Nasdaq, and Russell continuing declines from the previous week. Big tech stocks dragged the market, as all Magnificent 7 stocks fell, notably Tesla (-13.3%) and Nvidia (-7.2%). However, the equal-weight S&P index (RSP) slightly rose by 0.2%, signaling broader market resilience outside big tech.
Top-performing sectors included Financials (+2.80%), Real Estate (+2.13%), Healthcare (+1.74%), Consumer Staples (+1.26%), Industrials (+1.12%), Materials (+0.71%), and Energy (+0.13%). Conversely, Technology (-4.01%), Communication Services (-2.55%), Consumer Discretionary (-2.10%), and Utilities (-1.49%) lagged behind.
With 97% of S&P 500 companies reporting their fourth-quarter results, 75% have delivered earnings-per-share above expectations, and 63% surpassed revenue forecasts. Among major companies:
- Nvidia (+3.9%) beat earnings expectations, providing upbeat guidance despite concerns over weaker gross margin projections. Positive highlights were Nvidia’s report of strong demand for Blackwell products and Microsoft’s confirmation of capital expenditure guidance, supporting optimism around AI-driven growth.
- Alphabet (-16.5%) exceeded expectations in the Search and YouTube segments but faced investor worries over slowing Cloud growth.
- Amazon (-10.8%) reported solid operating income and met expectations on AWS growth, although future guidance disappointed.
- Salesforce (-12.8%) fell sharply after providing FY26 guidance below market consensus.
- Qualcomm (-9.1%) beat forecasts, though analysts expressed caution about reduced iPhone component share and potential tariff impacts.
- AMD (-13.9%) saw strength in Client and Gaming segments but reported softness in Data Center performance.
- Spotify (+10.8%) climbed significantly, supported by strong user growth and improved profitability metrics.
- Dell (-12.6%) posted weaker-than-expected revenues but stronger gross margins and EPS, alongside in-line FY26 guidance and enhanced capital returns.
- McDonald’s (+6.8%) outperformed with strong comparable-store sales driven by increased customer visits despite a lower average spend per visit.
- Alibaba (+34.0%) surged on robust AI-driven results and optimistic guidance.
- Uber (+13.7%) delivered strong results driven by Mobility and Delivery segments; investor Bill Ackman disclosed a position.
The Magnificent Seven (Mag-7) stocks have significantly weakened, entering a technical correction after falling over 10% since their December 17 peak and declining 4.5% year-to-date. Tesla faces the steepest drop at 37%, with Nvidia closely behind, losing 8.5% in Thursday’s sell-off and 6.7% for the week. Rotation away from Mag-7 stocks continues, lifting the average return of the remaining 493 S&P 500 stocks into positive territory this year and pushing correlation among the top 50 stocks to near-record lows.
International investors increasingly drive U.S. market inflows, doubling their average historical investments over the past five years to USD 18 trillion, compared to Americans owning USD 13 trillion in foreign equities.
Valuation remains high, with the U.S. stock market trading at a CAPE ratio of 33x, last seen during the dot-com era. U.S. tech stocks trade even higher at 59x.
The S&P 500 fell for four consecutive days this week amid broad market declines driven by escalating trade tensions. Equity market sentiment is extremely bearish, hitting its lowest point since 2022 and rarely seen since the Global Financial Crisis. Historically, low sentiment precedes strong market rebounds. 2025 is anticipated to be strong for mergers and acquisitions, with 58 companies raising $9.8 billion.
It is also worth going deeper into the UK equity market. UK equities appeared to be relatively undervalued compared to its global peers after a year of negative sentiment stemming partly from Brexit uncertainties, a changing business environment, domestic capital outflows and political instability that dampened consumer and business confidence. Furthermore, post-COVID high inflation, cautious monetary policy and growth ranging from negative to slow gave a terrible outlook that further discounted UK equities relative to US or its European peers. As a result, investors could pick up the FTSE 100 index (collective name for the 100 largest UK companies by value) at the second lowest PE in its history of 8.3 (compared to the lowest of just over 8.1 during GFC) and yielding 4.4% in dividends.
As the growth started to pick up, investors started to buy into highly discounted UK equities. As a result, the UK equity market has recently gone through multiple expansions. FTSE 100 has rallied 5% this year (from the tight range of 8,175 to 8,375 price and 11.7 to 12.4 PE for the second half of 2024) and 15% from the end of 2023 (from the range of 7,300 to 7,700 price and 10.3 to 11 PE for most of 2023 ). Currently, the FTSE 100 is trading at a 13x multiple, and despite this being relatively cheap, it is approaching historical average multiples. Unless there is a clear path to accelerated economic growth, there will be resistance to expanding those multiples much further.
However, historic bargain is gone from UK large caps, UK small caps valuation still didn’t recover and trade at most significant discounts among all major geographic regions. MSCI UK small cap is nearly flat for 5 years and trades at a PE of 13, which is almost 25% below its 10-year average PE ratio (however, one must remember that this average has been high primarily due to the 2021 bubble). The main reason is that while UK large caps derive their revenues primarily outside the UK, small caps rely on the domestic market and have suffered more outflows since Brexit. Although UK small caps are cheap, there is no catalyst in sight. Also, there are no inflows as the UK institutional investors retreated from the domestic market, with UK pension funds only holding 4.4% UK stock in their portfolio. Sentiment may shift if Chancellor Rachel Reeves can boost interest from institutional and retail investors in domestic equities or if the UK secures an attractive deal with the US (which has been in the making since the Brexit!).