RECAPPING LAST WEEK

U.S. equity indices stabilized in choppy trading after the Federal Reserve kept interest rates
steady while downgrading the economic outlook. The S&P500, Nasdaq Composite, and Russell 2000 indices all posted marginal gains. S&P500 sector performance was narrowly positive, boosted by outperformance from energy and financials. Crude oil prices rose 1.5% after Israel launched airstrikes in Gaza, threatening to end a two-month ceasefire and heightening Middle East tensions. Additionally, OPEC+ announced production cuts exceeding the planned hikes that are scheduled to go into effect in April—this in response to member nations who are producing above agreed levels. Gold futures advanced to another weekly record close at $3,025 per ounce.

U.S. Treasury yields tumbled after the Fed’s Summary of Economic Projections revealed an upward revision to inflation expectations along with slower GDP growth. Core PCE is forecasted to rise by 2.8% this year—a notable bump from the prior 2.5% estimate—while the economy is projected to grow by 1.7% in 2025 and 1.8% for each of the next two years.

The Fed also announced plans to slow the pace of its Quantitative Tightening program. Median “dot plot” projections still imply two rate cuts for this year and next, but a number of FOMC members revised their year-end federal funds rate forecast for 2025 and 2026 higher than it had been. Although Chair Powell noted that the economy remains strong and the labor market balanced, the Fed’s forecasts reflected rising uncertainty due to tariffs and other factors. In other news, U.S. retail sales increased 0.2% in February, a solid pace, albeit slower than the prior month. Single-family housing starts rebounded last month, but permits for future construction fell as rising construction costs and labor shortages loomed.

Existing home sales rose even as tight supply kept upward pressure on prices. On the international side, Germany’s parliament approved plans for the new government’s massive fiscal expansion to shore up infrastructure and defense investment, although some economists cautioned that labor shortages and bureaucratic red tape may delay
the positive ripple effects. The Bank of England kept interest rates unchanged at 4.5%, with one of the nine committee members favoring a quarter-point reduction. The Bank of Japan also held steady and pointed to upcoming data as crucial for the timing and pace of further rate hikes.

Japan’s core CPI was stronger than expected in February despite the resumption of government energy subsidies. Finally, China’s retail sales rose 4% in the first two months of the year, in line with forecasts, while industrial production outpaced expectations at +5.9%. The country’s policymakers announced plans to boost consumption but provided few details.

THE WEEK AHEAD

This week kicks off with today’s global flash PMI surveys. Investors will be watching closely to see if any of the recent swoon in sentiment indices is reflected in the manufacturing and services sectors. An update on the Fed’s preferred inflation gauge arrives Friday with the PCE index reading for February. Market volatility may continue around that release after the Fed raised its inflation outlook last week. Meanwhile, the White House hinted at some flexibility on tariffs late last week, but the April 2 deadline for reciprocal tariffs is fast approaching.

Other releases on the U.S. economic calendar include new and pending home sales, consumer confidence, durable goods orders, the third and final estimate of Q1 GDP, and this month’s revised consumer sentiment figures.

Overseas, German business and consumer sentiment indicators may see a boost after the country’s enormous fiscal spending plans passed legislative hurdles. In the UK, monthly CPI figures come out Wednesday morning, and embattled finance minister Reeves is expected to outline large spending cuts in the UK budget later that day. Last of all, minutes from Japan’s last central bank meeting will be released tonight, followed by the BOJ Summary of
Opinions and two important inflation readings later in the week.

(Schwab)