Bonds plunged, yields surged, and the curve inverted as recession fears grew. Stocks rallied on tariff relief, while gold, Bitcoin rose and oil, dollar fell.

Bonds suffered their steepest weekly decline since 2019, a period when the Federal Reserve was compelled to intervene. Yields on 30-year bonds surged more than 40 basis points, marking the largest weekly jump in long-term yields since 1982. Treasury bonds broadly sold off, further pressured by China’s ongoing reduction of its U.S. debt holdings. The spotlight remains on the scale of the sell-off and the sharp inversion of the yield curve. Both nominal and real yields are steepening, underscoring mounting concerns that a potential recession could strain the fiscal position of the U.S. federal government.

Equity markets rebounded sharply following former President Trump's announcement of a 90-day suspension of certain tariffs, with the exception of those on China and the auto sector, which remain in effect. Large-cap stocks significantly outperformed smaller counterparts, rising 5.70%. The “Magnificent 7” surged 8.45%, driving the Nasdaq up 7.43% for the week and lifting the S&P 500 by 5.70%. All sectors posted gains, led by technology (+8.75%) and industrials (+6.55%).

In currency and commodity markets, the U.S. dollar weakened 3.70% against the euro, marking its sharpest two-week decline since November 2022 and falling to its lowest level against major fiat currencies since October 2024. Commodities faced headwinds, with WTI crude slipping 1.35% amid escalating trade tensions between the U.S. and China, including new tariff hikes, while supply-side disruptions such as issues with the Keystone Pipeline and rising U.S. crude inventories added further downward pressure. In contrast, gold surged 6.52% to a new all-time high, posting its strongest weekly performance since the March 2020 COVID-19 lockdowns, and Bitcoin also advanced, gaining 5.40% over the week.

The Fed adopted a cautious stance amid persistent inflation, policy uncertainty, slowing growth, and weak consumer sentiment, with tariffs threatening renewed price pressures and labour market strain.

The March 2025 FOMC meeting minutes reflect a cautious monetary policy stance amid persistent inflation, economic uncertainty, and slower growth. Despite a recent decline, inflation remains above the 2% target, and early 2025 data showed unexpected price pressures, partly driven by tariff expectations. GDP growth slowed, unemployment held at 4.1%, and job creation weakened, prompting concerns about asymmetric risks—particularly that inflation could persist while employment deteriorates. Policy uncertainty and businesses' pricing power led the Fed to upgrade inflation projections. Participants proposed updating Fed language to better capture deviations in inflation and employment goals. Most members supported slowing the balance sheet runoff, reducing Treasury runoff caps, though some, like Governor Waller, dissented. March CPI data showed a rare decline, but looming tariffs—especially U.S. auto levies and China's retaliatory duties—may reignite inflation. Consumer sentiment dropped sharply for the fourth straight month, reflecting broad pessimism across demographics, surging inflation expectations, and increased unemployment fears. Overall, economic signals point to heightened volatility and policy caution ahead.

The FOMC’s March 2025 minutes reflect cautious policy due to persistent inflation, economic uncertainty, and slower growth, with a slowdown in balance sheet runoff.

The minutes of the Federal Open Market Committee (FOMC) meeting held on March 18-19, 2025, reflect a cautious stance by the Federal Reserve in light of economic uncertainties. While inflation has decreased significantly over the past two years, it remains above the long-term target of 2%. Recent data from early 2025 indicated inflationary pressures were higher than expected, driven partly by the anticipation of increased tariffs. Economic growth in the fourth quarter of 2024 was 2.3%, but projections for the first quarter of 2025 have moderated. The unemployment rate remained steady at 4.1% in February 2025, although job creation has slowed compared to 2024. Members of the FOMC highlighted asymmetric risks, with inflation potentially remaining higher and employment weakening, reinforcing the need for a more cautious approach. Some participants observed that the FOMC may face difficult trade-offs if inflation proves more persistent while the outlook for growth and employment weakens.

Policy uncertainty was a key consideration, with participants noting the high difficulty in assessing the net effects of government policies on the economic outlook. This uncertainty contributed to a more cautious monetary policy approach. The majority of participants flagged persistent inflation risks, particularly due to the impact of tariffs and businesses' willingness to pass on higher input costs to consumers. As a result, the staff upgraded inflation projections. Additionally, some members proposed reconsidering the language surrounding “shortfalls” in the Fed’s framework to better address deviations in inflation and employment goals, emphasizing robustness across various economic scenarios.

Regarding balance sheet management, most participants supported slowing the pace of runoff, reducing the Treasury securities' maturity limit from $25 billion to $5 billion per month. However, some, such as Governor Waller, dissented, arguing that existing tools were sufficient to manage any potential volatility. The FOMC’s communication stressed that this adjustment did not imply a change in the monetary policy stance or the ultimate balance sheet goal. The staff also revised GDP growth projections lower and inflation higher, citing tighter financial conditions and recent data. Risks were viewed as skewed toward weaker growth and higher inflation.

We expect that the Federal Reserve will maintain a cautious policy stance, addressing persistent inflation risks and economic uncertainties while slowing the pace of balance sheet runoff.

March U.S. inflation showed a surprise dip, with headline CPI falling 0.1% MoM and core CPI at 2.8% YoY, though tariffs could drive future price hikes.

The March U.S. Consumer Price Index delivered an unexpectedly subdued reading, offering a brief reprieve amid persistent inflationary concerns. Headline CPI declined by 0.1% month-on-month (MoM)—its first negative monthly print since May 2020—while core CPI, which excludes food and energy, rose just 0.1% MoM, the slowest pace since March 2021. On a year-over-year (YoY) basis, headline inflation slowed to 2.4%, below the consensus forecast of 2.5% and down sharply from 3.2% in February, while core CPI eased to 2.8% YoY, falling below the 3% threshold for the first time in over three years. The “supercore” measure, which excludes housing from services, dropped 0.1% MoM—the steepest decline since the COVID-19 lockdowns—bringing its annual rate down to 3.22%, the lowest since December 2021. These softer prints were driven by notable price declines across key categories: gasoline fell 6.1% MoM, airline fares dropped 5.3%, recreation slipped 0.1%, used vehicle prices declined 0.7%, and medical care commodities plunged 1.1%, including a 2.0% decrease in prescription drug prices. Overall energy prices were down 2.4% MoM. However, the outlook for inflation remains uncertain as cost pressures loom from newly announced tariffs—such as the 25% levy on foreign autos and China’s retaliatory 125% import duty—which are likely to disrupt supply chains and raise input costs across sectors. These factors could drive renewed upward momentum in prices, particularly in vehicles, parts, and services like repairs and insurance, undermining the recent softness and keeping inflation volatility—and Federal Reserve rate expectations—in sharp focus.

We believe the economy is showing signs of weakness, and despite the tariffs that Trump is playing with—now paused for 90 days, except in China—inflation may not rise as sharply as before. However, we expect inflation to remain volatile.

Consumer sentiment plunged amid widespread pessimism about inflation, unemployment, and trade, with expectations worsening sharply across all demographic and political groups.

Consumer sentiment declined for the fourth consecutive month in April, falling by 11% from March in a broad-based and unanimous downturn across all demographic groups and political affiliations. Since December 2024, sentiment has decreased by over 30%, driven by heightened concerns surrounding the evolving trade war. Consumers reported mounting signs of economic strain, including deteriorating expectations for business conditions, personal finances, income growth, inflation, and labour market prospects. Notably, the proportion of respondents anticipating a rise in unemployment increased for the fifth consecutive month, more than doubling since November 2024 and reaching its highest level since 2009—marking a sharp contrast with the labour-driven consumer resilience of recent years. Inflation expectations also surged, with year-ahead projections rising from 5.0% to 6.7%, the highest since 1981 and the fourth consecutive month of unusually large increases, a trend consistent across all political affiliations. Long-term inflation expectations rose from 4.1% in March to 4.4% in April, driven in part by a significant uptick among independents. These findings are based on interviews conducted between March 25 and April 8, prior to the April 9 announcement of a partial tariff reversal.

These results align with our earlier comments. We expect tariffs to fuel inflation, dampen consumer spending amid uncertainty, and further weaken the labour market.