RECAPPING LAST WEEK

U.S. equity indices stumbled for a third straight week as escalating trade and geopolitical tensions along with economic growth concerns put investors into risk-aversion mode. The S&P500 and Nasdaq Composite indices each fell more than 3%, while the Russell 2000 sank 4%. Ten of eleven S&P500 sectors lost ground, with financials and consumer discretionary taking the biggest hits. Value stocks were a lone bright spot, outperforming growth by a wide margin— leaders included sectors like consumer staples and healthcare.

Investors were jolted on Monday when the Atlanta Fed’s GDPNow model estimated annualized growth in the current quarter plunging from +2.3% to -2.8%. While these estimates can be volatile and are updated regularly as new data comes in—it was revised to -2.4% later in the week—it was still a stunning change. The news on Thursday that the White House was exempting some Canadian and Mexican goods from the 25% tariffs imposed earlier in the week failed to provide much relief. U.S. Treasury yields gyrated widely before ending the week higher, while the U.S. dollar tumbled to four-month lows.

The euro surged along with European stocks after Germany proposed a dramatic government
spending shift to create a 500-billion-euro infrastructure and defense fund. In other U.S.
economic news, nonfarm payrolls increased by 151,000 last month, slightly below estimates. The
unemployment rate ticked up to 4.1%, while the underemployment rate rose by 0.5% to 8%, the
highest level since 2021. A few pockets of weakness in the report are unlikely to spur the Fed to
any short-term action on cutting interest rates.

The U.S. manufacturing sector was steady in February while services growth edged higher, according to the ISM PMI surveys. Anxiety over tariffs was evident, however, and the prices paid component surged in both sectors. Shares of retail giant Target fell after warning that it expects a “meaningful” drop in first-quarter profit as consumers grapple with economic uncertainty. Overseas, the European Central Bank cut interest rates by a quarter point to 2.5%, following a report days earlier that CPI slowed to 2.4% YoY in the Eurozone. That news was almost an afterthought compared to Germany’s about-face that completely upended that nation’s tight controls on government borrowing. German bund yields soared more on Wednesday than they had since the country’s reunification in 1990. The fiscal policy change was prompted by the realization that Europe needed to act to protect itself from threats from Russia in the face of U.S. foreign policy shifts. Other EU leaders committed to loosening budget restrictions for increased military spending. Elsewhere, OPEC+ decided to proceed with next month’s planned oil output increase, sending crude prices lower by 3.5% to $67.40 per barrel. Finally, China’s exports slowed much more than expected and imports plunged to start the year. China set a 5% GDP growth target for 2025 at the annual National People’s Congress, but sluggish domestic demand and U.S. tariffs will likely pose significant headwinds.

THE WEEK AHEAD

The economic calendar is sparse this week, but trade policy fatigue and geopolitical concerns may keep volatility levels elevated. In the U.S., the main events will be February’s inflation data and this month’s preliminary consumer sentiment reading. Wednesday’s CPI report is one of the last key data pieces before the Fed meets next week, and while it is expected to hold rates
steady, fed funds futures are pricing in three quarter-point cuts by year-end.

A hot inflation report would not be welcome news—for the Fed or investors. In last month’s consumer sentiment report, inflation expectations jumped a full percentage point to 4.3%, so it bears watching Friday’s release for any changes. The rest of the U.S. agenda includes the JOLTS job openings report (which strangely arrives a week after the other labor reports), the producer price index, and 10-and 30-year Treasury auctions. On the international side, the Bank of Canada faces a tough interest rate decision when it meets Wednesday, as a rebounding economy is threatened by U.S. tariffs. Odds still favor a 25-basis point reduction.

(Schwab)