Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Last week, trading was once again driven by Iran headline volatility. However, the S&P 500 snapped a 5-week losing as there were signs that the administration was looking for a potential off ramp and hopes for de-escalation. As markets were closed on Friday the BLS Employment report was released and continued a string of volatile readings. On the surface it was a strong report with just under ~180k jobs added to the economy, nearly 3X the estimate, reversing the sharp decline in the previous month - while the unemployment rate also ticked down to 4.3%. However, the underlying metrics within the report were a bit more mixed with gains driven primarily by healthcare/social assistance, a weaker household survey which showed the labor force shrinking by 400k, a decline in average hourly earnings and the length of the workweek. On the surface it was a hawkish report easing some of the concern about the labor market with the prospect of an inflationary impulse on the horizon, with this week’s inflation data expected to start to shed some light on that front.  

By the time markets re-opened on Monday that report was old news, once again overshadowed by Iran headlines. Over the weekend President Trump threatened to “obliterate” key infrastructure if a deal wasn’t reached before the impending deadline, which he ultimately pushed back to 8:00 on Tuesday evening. Most global markets were closed for the holiday, but S&P futures were down >0.5% in the overnight session. US equities ended Monday modestly higher amidst reports suggesting last ditch diplomatic efforts. However, it was the lowest volume session of the year - with light attendance and traders largely sitting on their hands given the wide range of potential outcomes. With the time quickly running out on the clock, markets were once again under pressure early on Tuesday. The situation remained fluid as the two-sides continued to exchange bellicose rhetoric. The US hit military targets on Kharg island and Israel struck bridges and railways. However, once again by the end of the day markets had recouped losses with hopes that diplomacy would prevail.

Over the last few weeks, we have discussed the anniversaries of some recent key market moments - the Covid low, the Rose Garden and there was another this week as it was the 1yr anniversary of the tariff policy pivot which led to over a 10% intraday reversal in the S&P 500. This sparked a rally that lasted throughout the end of last year and the ultimate creation of the TACO moniker. So it was fitting that, on a Tuesday night nonetheless, just minutes before the deadline President Trump announced that there would be a 15-day ceasefire. There were some similarities in the unwind of positioning ahead of the aforementioned policy pivot, however, this time around that unwind was much more contained. That being said, portfolios were over hedged and under invested helping equities surge as both oil and natural gas markets moved sharply lower. Global indices outperformed US markets - they had been hit harder since the start of Epic Fury, given the reliance on energy from the region.

Equities have been able to extend gains modestly over the back half of the week but there is still plenty of skepticism that the ceasefire will hold and as traffic through the Strait remains severely constrained. Negotiations are expected to take place in Pakistan this evening which will clearly set the tone for markets next week. For the second consecutive week major US indices are up >3% with pretty broad-based gains. 

The AI complex commanded significant attention on the Street this week, with a confluence of landmark model launches, sweeping infrastructure commitments, and a cybersecurity development that rattled both the tech industry and Washington. The most consequential story came from Anthropic which formally unveiled Claude Mythos Preview, its most powerful model to date, but announced that it would not be released to the public as it demonstrated the ability to identify and exploit zero-day vulnerabilities in major operating systems and web browsers. OpenAI has reportedly followed suit with its most recent model as well. The company did announce a controlled, defensive-use rollout called Project Glasswing to a group of tech, cybersecurity and financial firms to bolster cyber defenses across some of the world’s most critical systems. This release caused Treasury Secretary Bessent and Fed Chair Powell to summon bank CEO’s to Washington to discuss earlier in the week. This reignited the AI disruption concerns and weakness in the software sector again with losses ranging from 5% - 20% for the week.

On the flipside we’ve seen strength in semis with the ICE Semiconductor index up >10% for the week hitting new all-time highs. Below we’ve included a chart highlighting the ~150% outperformance of semis over software over the last year. Broadcom and Intel both had new partnership announcements. Memory stocks have rebounded helped by strong Samsung earnings. AI infrastructure stocks have also rebounded as there are no signs that hyperscaler spending is slowing down. In his letter to Shareholder Amazon’s Andy Jassy was very bullish about the company’s AWS and chip business which he said if it included chips sold to AWS would have an annual run rate of ~$50B. He said he was willing to commit to large capex investments which cause some short-term FCF headwinds as “AI is a once-in-a-lifetime opportunity”. This week Meta also released its newest AI model Muse Spark and >$20B commitment with neo-data center operator Coreweave. 

Within the S&P 500 the mega-cap tech heavy sectors were all up >5%. Consumer discretionary was also helped by a rebound in travel related, apparel and housing related stocks. There were some related positive consumer related updates. Levi and Strauss and Delta Airlines both had solid earnings results. The latter highlighted strong demand from both leisure and corporate customers. The company said it was cutting capacity and increasing some fees to helps absorb the increase in fuel costs. Industrials was the other sector standout sector to the upside with the AI related infrastructure stocks topping the leaderboard and offsetting some weakness in defense and professional service companies.

Energy was the only sector to trade down this week while there was some underperformance in defensive sectors like consumer staples, Utilities and healthcare. In healthcare managed care stocks had a relief rally after CMS released the final Medicare Advantage Payment rates that were much improved from January’s preliminary schedule.

Next week the focus is going to start to shift to earnings with the major banks officially kicking off earnings season. According to FactSet S&P 500 earnings are expected to increase by 12.6% on a y/y basis the sixth consecutive quarter of double-digit earnings growth. Earnings estimates have been moving higher throughout the start of the year which has been one of the reasons that markets have held up during the recent selloff. Investors will be paying close attention to conference calls to see how the environment is evolving.  Within financials credit quality will be a big topic given the recent private credit redemption situation. Investment banking and capital markets activity was strong early in the quarter but slowed down in the back half while trading numbers should be positive. 

Last week’s rally left the S&P 500 just under its 200d ma and the index gapped above this level on the ceasefire announcement. The index has quickly worked off oversold conditions and is trading back into overhead resistance and the range that it had been trading in prior to the breakdown last month. 

There has been a big compression in volatility measures (see VIX/MOVE chart below) which creates an environment where systematic investment strategies start putting capital back to work again but what happens this weekend could change that dynamic quickly. 

The big inflation prints this week didn't cause too much excitement. February PCE data was inline with expectations. However the 3.0% y/y increase in core, before any effects from Iran registered, was not exactly comforting. CPI was more relevant as it included the Iran War period. As widely expected, there was a big jump in the headline, up 0.9% m/m and 3.3% y/y, but that was in line with consensus. Gasoline’s 21% increase accounted for nearly three quarters of the monthly increase. Core was a little better than expected, up 0.2% and 2.6%, respectively, helped by a 0.4% decline in used cars.

With no major surprises, markets could look past the data- the path on which they were lined up to travel. The real focus is on the ceasefire negotiations as this will be the determining factor as to whether the oil price shock will indeed be… transitory….Dun Dun Dun!!!! 

Weekly claims addressed the other side of the Fed's mandate. Initial Claims were higher than expected and rose from last week, reaching their highest level since early February, though remained well within the longer-term range. Continuing Claims fell below 1800k for the first time in almost 2 years. 

The FOMC minutes from the March meeting underscored the Fed’s wait-and-see line of thinking, though the committee still leans towards rate cuts as long as inflation declines as expected. However, it wasn’t hard to find hawkish commentary either, centered on the disinflation stalling out (“The vast majority of participants noted that progress toward the Committee’s 2 percent objective could be slower than previously expected and judged the risk of inflation running persistently above the Committee’s objective had increased.”).  There were also some members, (like Cleveland Fed President Hammack), that advocated for a two-sided description of future rate decisions if inflation persisted above target. Speaking of, The NY Fed released its Survey of Consumer expectations which showed a bump in 1yr inflation expectations but the 3/5yr horizons remain well-anchored, as the Fed would say.

The ISM Services PMI missed estimates and fell from last month but remained in expansion while registering the second highest reading since October 2024. It was a mixed bag overall- New Orders rose but Employment fell into contraction while Prices rose to their highest reading since October 2022. Commentary was focused on uncertainty around the Iran war as expected.

The final Q4 GDP estimate was revised lower, from 0.7% to 0.5%, mainly on a downward revision to Investment. The prior estimate was itself a downgrade from the initial 1.4%. Personal Income showed some weakness, falling 0.1%, missing estimates and down from the prior month. Durable goods orders fell more than expected but the ex-transports reading was better than expected and rose from last month, while the capital goods orders, a proxy of business spending, increased by 0.6% after being flat last month.

US treasury yields were modestly lower this week (2s and 10s -3bp) with a bit of steepening. Wednesday saw traders take yields down 10bp at the lows after the ceasefire before they bounced back to finish around unchanged. Treasury auctions continued to be on the weaker side of things in the aggregate, but that hasn’t triggered too much concern yet. European yields saw curves steepen as long-ends rose and short fell, with energy price declines easing some of the inflation concerns. Markets are pricing in a 75% chance that the Fed keeps rates on hold for the rest of the year. A month ago it was 15%, with about 40bp of cuts priced in.

The US Dollar Index fell over 1% as the currency market looked optimistically at the ceasefire.  It gapped below 99 on Wednesday and is testing a significant area of support ~98.50. The Yen was modestly stronger as it pulled back from the 160 line in the sand level when central bank intervention talk ratchets up. The Swiss Franc and British Pound saw strong gains.

We'll hopefully have some good news after the US and Iran hold negotiation over the weekend. Then, earnings is back! Q1 kicks off with the big financials reporting throughout the week. JNJ, ABT, TSM and ASML will also attract significant interest in their reports. US economic data will be relatively light, with PPI, Existing Home Sales, Import/Export prices and the Empire Manufacturing index headlining. It will also be the last week for Fedspeak before the blackout window starts Saturday. Internationally, China will have a bunch of data, including trade data, Q1 GDP and Production. The ECB's monetary policy accounts (i.e. the minutes) will be published. IMF/World Bank Spring Meetings will take place all week in D.C., bringing together central bankers, national heads of finance, and corporate executives. The IMF will also publish its World Economic Outlook. OPEC and the IEA will publish their latest oil reports. Lastly, Wednesday is the deadline for filing taxes. With that, enjoy your weekend!      

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