Treasury yields fell, boosting bond prices. Equities saw significant losses, particularly small caps. Commodities mixed, gold rose, and the dollar weakened against the euro.

Treasury bond yields ended the week lower, boosting bond prices. The 3-month/10-year US Treasury yield spread turned positive but remains below historical levels. With current short-term rates, the 10-year bond yield could rise further, maintaining a spread typical of past decades. Weaker-than-expected manufacturing data fuelled expectations of a 2025 rate cut, with about 50 basis points priced in.

Equities posted significant losses during the week, with small- and micro-cap stocks seeing the largest declines, down 3.60% and 4.20%, respectively, while large-cap stocks fell 1.65%. The "Magnificent 7" dropped 3.49%. Sector performance was mixed, with consumer staples, healthcare, utilities, and energy sectors posting gains, while other sectors saw losses. The VIX surged sharply, rising above 23%.

The US dollar strength against the euro, increasing by 0.30%. Commodities experienced varied movements: Crude oil (WTI) fell 0.47%, closing at $70.24, driven in part by speculation that the conflict in Ukraine could soon come to an end. Additionally, the Kazakh company overseeing the pipeline, previously a focus of attention due to its proximity to the Ukraine conflict, confirmed continued operations without disruptions, amid expectations of weaker-than-anticipated demand for crude. Gold rose 1.94%, reaching $2,949.70, continuing its upward trajectory with no negative weekly performance since the start of 2025. Meanwhile, Bitcoin gained 0.20%.

February’s US PMI fell to a 17-month low, with contracting services, steady manufacturing, weakened business optimism, rising inflation concerns, and a weakening housing market.

The US Composite PMI dropped to a 17-month low of 50.4, signalling near-stalled business activity, with services contracting for the first time in 25 months, while manufacturing remained steady at 51.6. Political uncertainty and rising costs weakened new orders, particularly in services, and business optimism fell to its lowest point since December 2022. Input costs surged, driven by tariffs and supplier-driven price hikes, while employment declined slightly after January’s surge. In the housing market, housing starts fell, impacted by high mortgage rates, supply constraints, and affordability issues, while builder sentiment also weakened. Existing home sales declined, and prices rose, though some cautious optimism remains for potential rate easing. Consumer sentiment dropped nearly 10%, with inflation expectations rising, especially among Democrats and Independents, signalling growing concerns about future price increases and the economic outlook, which may weigh further on consumer confidence in the near future.

February's US Composite PMI dropped to a 17-month low, with services contracting, manufacturing steady, and business optimism plummeting amid political uncertainty and rising costs.

The US flash Composite PMI dropped 2.3 points to a 17-month low of 50.4, signalling near-stalled business activity. This decline was driven by a 3.3-point drop in services, which fell into contraction for the first time in 25 months, a sharp contrast to last year’s strong expansion. Manufacturing, however, rose to 51.6, an 8-month high, maintaining the composite above 50 for the 24th consecutive month. New orders weakened, with service sector demand falling to a 10-month low due to political uncertainty over spending cuts and economic policies. Manufacturing orders also slowed due to weaker exports, although production rose to an 11-month high. Business optimism plummeted to its lowest since December 2022, aside from last September, amid concerns over federal policies, inflation, and geopolitical risks, although manufacturing sentiment remained relatively strong. Selling prices fell to a 3-month low, driven by services, which saw their lowest level since June 2020, while manufacturing saw the largest price increase in two years. Input costs surged to their highest since September, with raw material prices climbing due to tariffs and supplier-driven price hikes. Employment dipped slightly after January’s job growth surge. The early optimism of 2024 has been replaced by rising uncertainty, stalled business activity, and higher prices, as companies grow increasingly concerned about the impact of federal policies, tariffs, and political instability on sales and inflation.

We expect these trends to persist, with political uncertainty and rising costs continuing to impact business activity. Manufacturing may hold steady, but services could remain weak.

Housing starts declined amid high mortgage rates and supply constraints, while builder sentiment fell. Existing home sales dropped, prices rose, and cautious optimism remains for potential rate easing.

Housing starts declined to 1.366 million, falling short of the expected 1.390 million, as single-family (-8.4%) and multifamily (-11%) starts weakened due to adverse weather, mortgage rates exceeding 7%, and ongoing supply-side and affordability challenges. Permits rose to 1.483 million, exceeding the 1.46 million consensus but remaining flat month-over-month, reflecting continued builder caution. Builder sentiment dropped to its lowest level since September, with a 13-point decline in single-family sales expectations for the next six months—the largest one-month decline since the early months of the COVID-19 pandemic. Elevated material costs, approximately 40% above pre-pandemic levels, along with persistent supply-side constraints—including labour shortages, lot availability, legal and financing complexities, and tariff uncertainties—continue to pressure the sector. Meanwhile, January's existing home sales declined 4.9% MoM, surpassing the expected -2.6% drop, despite an upward revision in the prior reading to +2.9%. The median home price increased 4.8% YoY to $396,900, while monthly supply rose to 3.5 from 3.2, reflecting constrained inventory dynamics. Although the new home market remains a relatively bright spot, supported by limited resale inventory and builder incentives such as mortgage rate buydowns and upgrades, the use of sales incentives has slightly declined, likely due to a shrinking pool of eligible buyers amid elevated borrowing costs. Looking ahead, cautious optimism remains that the Federal Reserve may ease rates later this year, albeit at a slower pace than previously anticipated, which could provide some relief to housing affordability and market activity.

We do not expect a short-term recovery in the housing market, with a slight recovery likely at the end of the year. Mortgage rates are around 7% and slower construction will continue to pressure affordability and limit market growth.

Consumer sentiment dropped nearly 10%, with declines across all groups. Inflation expectations rose significantly, especially for Democrats and Independents, marking the highest increase since November 2023.

Consumer sentiment continued its early-month decline, dropping nearly 10% from January, with all age, income, and wealth groups showing a decrease. Every component of the index worsened, notably a 19% drop in buying conditions for durables, driven by concerns over impending tariff-induced price hikes. Expectations for personal finances and the short-term economic outlook fell by almost 10%, while the long-term economic outlook dropped 6%, reaching its lowest point since November 2023. Sentiment declined for Democrats and Independents but remained unchanged for Republicans, reflecting ongoing political disagreements over economic policies. Inflation expectations for the year ahead surged from 3.3% to 4.3%, the highest since November 2023, marking two consecutive months of notable increases. Long-term inflation expectations also rose, from 3.2% in January to 3.5% in February, the largest month-over-month increase since May 2021. These increases were widespread across income and age groups, with Independents and Democrats seeing higher inflation expectations, while Republicans experienced a slight decrease.

This movement is consistent with our previous assessments. We foresee a continued decline in consumer confidence before sentiment begins to recover, and we expect a modest increase in inflation in the near term, as outlined in our prior reports.