Treasury yields fell, despite a Friday rebound. Equities gained, with small caps leading. The "Magnificent 7" dropped, extending their YTD loss. Investors reduced US stock exposure, shifting capital to Europe. Oil and gold rose.

Treasury yields declined this week, despite a rebound on Friday. Yields on maturities longer than two years saw a notable drop of 30 basis points. Compared to a month ago, the market now appears to be pricing in more anticipated rate cuts. As tariff-related risks continue to rise, investors may increasingly turn to bonds as a defensive strategy.

Equities posted gains, with small- and micro-cap stocks leading the charge. The "Magnificent 7" dropped nearly 1%, extending their YTD loss to 13%, with Tesla remaining the biggest laggard at -35% YTD. Most sectors finished higher, except for materials, consumer staples, and utilities, which saw slight declines. Investors are reducing their exposure to US stocks at a record pace, with allocations dropping by 40 percentage points to the lowest level since June 2023. ETF data, which tracks real-time money movements, shows a clear outflow of capital towards Europe.

The US dollar strengthened by 0.60% against the euro. Crude oil (WTI) climbed 1.65%, marking its second consecutive week of gains, as fresh US sanctions on Iran and an updated OPEC+ production plan fuelled expectation of tighter supplies. The revised OPEC+ agreement requires seven member states to curb output further to offset previous overproduction. Meanwhile, gold extended its rally, rising 1.16% to a new all-time high, as investors sought safety amid mounting global trade war concerns. Bitcoin edged up 0.30%.

The Fed kept rates unchanged, lowered GDP growth forecasts, raised inflation projections, and slowed quantitative tightening, with market expectations for rate cuts by late 2025.

The Federal Reserve kept interest rates unchanged in the 4.25%-4.5% range, but the market expects rate cuts by late 2025 due to economic uncertainty. GDP growth projections for 2025 were revised down to 1.7%, while inflation expectations rose to 2.8%. The Fed also slowed the pace of quantitative tightening, reducing Treasury redemptions to $5 billion per month. Despite these expectations for rate cuts, Powell emphasized that the Fed will wait for more concrete signs of economic weakness before acting. February retail sales grew by just 0.2%, missing forecasts, with inflation pressures impacting discretionary spending, particularly on restaurants. The housing market showed resilience with an 11.2% increase in housing starts, but building permits declined and builder sentiment weakened due to cost pressures and labour shortages.

The Fed keeps rates unchanged, lowers GDP forecasts, raises inflation projections, slows QT, and stresses uncertainty, signalling potential rate cuts in late 2025 amid rising recession risks.

The Federal Reserve has maintained its policy stance, keeping interest rates unchanged within the 4.25%–4.5% target range while emphasizing concerns over inflation and slowing economic growth. The latest projections indicate a downward revision in GDP growth expectations, now at 1.7% for 2025 (previously 2.1%) and 1.8% for both 2026 and 2027. The unemployment rate is expected to rise slightly, reaching 4.4% in 2025, higher than the previous 4.3% estimate. Meanwhile, inflation forecasts have been adjusted upward, with Core PCE inflation projected at 2.8% for 2025, compared to the previous 2.5%, before moderating to 2.2% in 2026 and 2.0% in 2027. The Fed has also decided to slow the pace of quantitative tightening (QT), reducing the monthly cap on Treasury redemptions from $25 billion to $5 billion, effectively increasing its net Treasury purchases. Powell reaffirmed that the Fed remains in a position to either cut or maintain rates, stressing uncertainty as a key factor in future policy decisions.

Despite speculation that weaker economic data might prompt a shift toward rate cuts, Powell emphasized that the Fed will wait for more concrete signs of economic weakness before acting. The updated federal funds rate projections remain unchanged from December, with expectations of 3.9% by the end of 2025, declining to 3.4% in 2026 and 3.1% in 2027, before stabilizing at 3.0% in the longer run. Fiscal policy changes, including government spending cuts and broad-based tariffs set to take effect in April, pose risks to corporate profits and consumer spending. While the Fed has signalled a more cautious approach to QT to maintain liquidity, the overall economic outlook suggests increasing recession risks due to weaker growth forecasts and mixed inflationary pressures. The Fed is expected to hold rates steady through the summer before considering cuts in September and December, followed by a potential third cut in early 2026.

We anticipate increased inflation driven by Trump's proposed tariffs, which may weaken consumer spending. We align with the Fed’s forecast of lower GDP growth for 2025.

U.S. retail sales rose 0.2% in February, missing forecasts. Restaurant sales plunged, and inflation-hit consumers cut spending, but e-commerce and essential goods saw gains. Core sales rebounded 1%.

U.S. retail sales rose 0.2% MoM in February 2025, recovering from a downwardly revised 1.2% decline in January but falling well short of the expected 0.6% increase. Over the past four years, inflation-adjusted retail sales have declined by approximately 3%, reflecting a broader trend of weakened consumer purchasing power. This pattern is similar to what was observed before and during the 2001 recession. Americans' spending has struggled to keep pace with rising costs of necessities, leading to pullbacks in discretionary spending. Seven of the 13 major retail categories saw declines in February. Restaurant and bar sales fell 1.5%, marking the biggest drop since February 2023. This was the second decline in three months, and over the past quarter, restaurant sales have plunged at an annualized rate of 8.5%—the steepest drop since Q1 2022, when GDP shrank by 1.0%. Higher food inflation has played a significant role, with the cost of dining out rising roughly 30% over the last five years, making it increasingly unaffordable for many Americans. Other declines included gas stations (-1%), clothing (-0.6%), auto dealers and parts (-0.4%), and sporting goods, hobbies, musical instruments, and bookstores (-0.4%). Miscellaneous retailers (-0.3%) and electronics and appliances (-0.3%) also saw decreases. However, some categories experienced growth. Non-store retailers, including e-commerce, surged 2.4%, signalling strong online shopping activity. Pharmacies and personal care sales rose 1.7%, while food and beverages increased 0.4%. General merchandise and building materials both saw modest gains of 0.2%. Notably, core retail sales, which exclude food services, auto dealers, building materials, and gas stations—key components used to calculate GDP—rose by 1%, reversing a downwardly revised 1% decline in January and significantly outperforming expectations of a 0.2% increase. This suggests that while overall consumer spending remains pressured, certain segments of the economy are proving more resilient, particularly in essential goods and online sales.

We expect consumer spending to remain flat due to uncertainty surrounding inflation and guidance on Trump’s trade policies, leading consumers to restrict their spending.

U.S. housing starts rose 11.2% in February, signalling sector resilience. However, building permits declined, and builder sentiment weakened amidst cost pressures and labour shortages.

U.S. housing starts experienced a notable surge of 11.2% MoM, reaching a seasonally adjusted annual rate of 1.501 million, surpassing the consensus expectation of 1.385 million and reversing the decline observed in January. Single-family starts rose to 92,000, marking the highest level since February 2024. This rebound demonstrates resilience within the housing sector, alleviating concerns of an imminent economic downturn. Furthermore, single-family completions increased by 7% compared to the previous month, offering immediate relief to supply constraints, particularly in the Northeast and Midwest regions. While challenges persist, the latest data suggests a near-term expansion as the critical spring season approaches.

Building permits, a leading indicator of future construction activity, decreased to an annualized rate of 1.456 million in February, slightly above the market consensus of 1.453 million. However, the year-over-year trend remained negative, with a continued deterioration. Single-family permits showed stability on a month-over-month basis but were down 3.4% compared to the same period last year. Builder sentiment further weakened, reaching its lowest point since August, as the industry faces ongoing cost pressures, labour shortages, and policy uncertainty. Construction costs remain approximately 40% above pre-pandemic levels, with recent tariff measures potentially contributing to rising home prices. While the strong increase in housing starts suggests momentum in the short term, the decline in permits signals continued softness in future construction activity.

Existing home sales rose by 4.2% MoM, surpassing the expected decline of 3.2% and the prior month’s revised drop of 4.7% (upgraded from -4.9%). The median home price increased by 3.8% YoY, reaching $398,400. Inventory saw a substantial gain, up 17% YoY, marking the largest February increase since 2020. The median sales price for existing single-family homes rose to $402,500 in February, reflecting a 3.7% YoY increase. This ongoing price appreciation persists despite challenges related to affordability and elevated mortgage rates.

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 6.7%, and slower construction will continue to pressure affordability and limit market growth.