A highly volatile week unfolded, marked by uncertainties surrounding the economy, trade wars, and geopolitical risks. U.S. equity indexes closed 2.50% to 3.50% lower, while Treasury bond yields increased by 10bps, and credit spreads widened by 2bps to 20bps. Amid this scenario, the VIX volatility index is trading at its highest level since December 2024.
Economic data was soft, with a weaker ISM manufacturing index and payroll figures slightly below expectations. The markets are now pricing in three rate cuts of 25 basis points from the Fed this year. Meanwhile, chairman Powell stated that the economy is doing well while reiterating that they are not in a rush to cut rates.
Markets remain vigilant regarding U.S. tariff policies and their potential impacts on the risk of an economic recession. After some back-and-forth announcements, President Trump exempted Canada and Mexico from the 25% tariffs on any goods or services until April 2.
Tensions have also escalated on the geopolitical front, with the U.S. suspending military aid to Ukraine. Signals that the country may reduce monetary commitments to Europe and Asia were met with Germany and France announcing increased fiscal spending on defense, leading to a 40bps weekly surge in European bond yields.
This week, key metrics to watch include the Michigan consumer sentiment reading and the February releases of the consumer price index (CPI) and producer price index (PPI), along with new announcements regarding tariffs from the U.S. government.
