RECAPPING LAST WEEK

U.S. equity indices finished the week flat-to-lower as gains early faded into lingering inflation concerns to end the week. The S&P500 and Nasdaq Composite indexes fell 2%, while the small cap Russell 2000 lost 4%. Six out of eleven S&P500 sectors were negative on the week, while utilities and healthcare gained 1.5% and 1% respectively. Crude oil prices had another volatile week amid turmoil in Ukraine, yet finished mostly unchanged after reports of rising inventories caused a price pullback on Friday. Gold futures once again rose 2% to a new all-time high of $2973.40, edging ever closer to $3,000 per ounce. U.S. Treasury yields and the U.S. Dollar index both continued drifting lower, leaving the normal inverse correlation with equities at odds. Inflation and tariffs remain the main drivers of macro volatility. In Wednesday’s FOMC minutes, Federal Reserve officials seemed comfortable holding interest rates steady amid uncertain economic policies and slowing disinflationary trends.

President Trump said he intends to impose tariffs “in the neighborhood of 25%” on automobiles and that he plans similar duties on semiconductors and pharmaceutical imports. Fed officials noted not only that these would lead to higher prices, but that the administration’s piecemeal approach is
adding uncertainty about precisely which products would be affected. Headline U.S. PMI Index dropped to 50.4 from 52.7 in January, a 17-month low, and unemployment claims rose to 219,000, an increase of 5,000 from the week before. U.S. manufacturing data came in mixed as the Empire State Manufacturing Index popped to +5.7 in February from -12.6 in January, but the Philly Fed Index fell to 18.1 from 44.3 in January, the largest monthly drop in five years. The UofM Consumer Sentiment survey showed a 19% decline in buying conditions for durables, largely the result of fears of imminent tariff-induced price increases. Cost concerns are hitting the housing market as well, with the NAHB housing index dropping from 47 to 42. Existing home sales dropped 4.9% in January, though this level is still 2% higher than a year ago as prices increased for the 19th consecutive month. Housing starts slowed as builders pulled back amid concerns about mortgage rates and current inventory.

Across the Atlantic, Eurozone data came in more constructive, though inflation seems sticky in that region as well. UK CPI came in 3% higher in January vs 2.8% expectations, with some of that result coming from wages, as annual pay growth rose 5.9% from October to December. Retail sales rose by 1.7% as well. German PPI was 0.5% higher than a year ago, and their ZEW Economic Sentiment rose to 26, its strongest increase in two years. Australian and German PMIs were broadly expansionary yet showed a slight contraction in the UK. Australia’s unemployment rate ticked higher to 4.1% from 4%, and the RBA cut rates for the first time in four years while China left their rates alone. Inflation stayed front of mind in Canada and Japan, showing 1.9% and 4% increases respectively. This means headline inflation has been above Japan’s 2% target for 34 straight months. On the plus side, Japan’s economic expansion beat expectations in the fourth quarter when GDP grew 0.7% QoQ vs 0.4% prior.

THE WEEK AHEAD

While this week’s slate of U.S. economic data is fairly light, Friday’s U.S. Core PCE Price Index has
inventors on pins and needles. We’ll have plenty of Fed commentary to chew on by the time it arrives, and after last week’s cautionary tone in the Fed minutes, we may continue to see a bull flattening in the U.S. yield curve, where the 10-year yield faces more pressure than the short-end.

More broadly, yields continue to face three fundamental headwinds: the pull-forward in U.S. business’ purchases ahead of tariffs, the potential labor market effects of the administration’s immigration policies, and largely benign inflation data. In Europe, the week kicked off with Germany’s elections over the past weekend, while major earnings announcements from Home Depot and Nvidia will surely capture investors’ attention. Nvidia filled the gap last week that was created from the DeepSeek demo at the end of January, leaving further upside at the mercy of this week’s earnings.

Inflation will still be front- of-mind, with CPIs coming out of the EU on Monday, Australia and Japan on Tuesday, and Germany on Friday. UK monetary policy hearings are on Tuesday, while the ECB policy meeting minutes are released Thursday. Economic data is heavy out of Germany this week with the ifo Biz Climate survey Monday, GfK Consumer Climate on Wednesday, and retail sales coming in Friday.

(Schwab)