Written by the Market Insights Team
Reading between the bond lines
Kevin Ford – FX & Macro Strategist
There’s a clear divide between soft and hard economic data. Measures like the Philly Fed index, the NAHB index, and business and consumer sentiment indicators have sharply declined. Just yesterday, the Conference Board’s Consumer Confidence index, which has recently driven a shift from U.S. equities toward European and global markets, fell again, hitting its lowest level since 2022. U.S. consumer confidence dropped for the fourth consecutive month due to growing concerns about tariffs and inflation. Short-term expectations for income, jobs, and business dipped to 65.2—a 12-year low. The Conference Board warns that a reading below 80 could signal a potential recession in the near future. On the hard data side, rising WARN notices and increased job cuts are worrisome. However, initial jobless claims remain low, retail sales have been steady, and Q1 growth is still pointing to modestly positive.
The markets, this time, seem less rattled by the report. The VIX index is holding around 17, while the FX market reaction has been muted, with the dollar consolidating last week’s gains. It appears markets are following Powell’s lead in treating survey data as ‘noise.’ His recent comments at last week’s FOMC meeting stood out—he dismissed survey data on inflation expectations, emphasizing that they remain well-anchored.
Also, spreads in U.S. investment grade fixed income, which typically act as a barometer for economic health concerns, have shown surprising resilience. Despite heightened market volatility and a surge in recession predictions for 2025 in recent weeks, these spreads have not deteriorated. This stability stands out against the backdrop of increasing economic uncertainty.
This raises an important question: Are markets underestimating the economic impact of tariffs, or have they already absorbed the implications of the aggressive trade policies? It is possible that markets have priced in the uncertainty, leading to an overreaction in light of the challenges posed by the current trade environment.
Looking ahead, the upcoming University of Michigan report will be of relevance. If confidence measures drop further or inflation expectations climb, it could challenge the Federal Reserve’s stance, making it harder to downplay troubling trends in consumer surveys.
The CAD strengthened yesterday, aided by President Trump’s praise for Canada and Mexico’s progress, stating they’ve ‘stepped it up a lot.’ USD/CAD is trading below its 100-day SMA (1.426), at 1.425, as tariff concerns ease temporarily ahead of April 2nd.
A surprising spring in sterling’s step
George Vessey – Lead FX & Macro Strategist
As the Spring Statement beckons, the British pound has an unusual spring in its step considering the event has been dubbed more of a downside risk for sterling by many investors and economists. GBP/USD remains buoyant around $1.29, nearer the top end of its 5-month range, whilst GBP/EUR clipped €1.20 this morning, up 0.5% this week and clawing back its month-to-date losses. UK inflation data and the subsequent rise in Bank of England (BoE) easing bets have weighed slightly this morning though.
Despite the the doom and gloom surrounding the Spring Statement, sterling is showing resilience, which is hard to explain given the ongoing tariff-related anxiety amongst market participants, keeping risk taking in check too. Moreover, this morning we saw UK headline inflation data coming in softer than expected at 2.8% y/y versus 3%. Core inflation also surprised a tick lower at 3.5%. However, service inflation, a key indicator of domestic price pressures, was unchanged at 5%, versus the expected 4.9%. Overall, the picture hasn’t become any clearer for the BoE and its policy path, but the probability of a cut in May has jumped from under 60% to 75% today. Still, despite the gradual loosening cycle that the BoE has flagged, two-year gilt yields have actually risen since the central bank last cut rates in February. This shows how skeptical the markets have become about the central bank’s ability to keep cutting rates.
Higher Gilt yields also means higher debt interest costs have wiped out the Chancellor’s wiggle room already. This brings us to today’s focus where Chancellor, Rachel Reeves, aims to recoup that £10bn in ‘headroom’ lost. In short, it is expected that the Treasury will have to curtail its future spending ambitions to achieve this and we already know new welfare cuts are on the cards. The remaining savings would presumably come from trimming departmental budgets. But spending cuts might provide only a temporary fix to deeper budgetary challenges given UK gross government debt has seen the largest rise across 40 advanced economies, according to IMF data.
The rise reflects Britain’s stagnant economic growth and the legacy of costly government responses to the pandemic and higher energy costs. In an environment of lower growth and higher interest rates, it is more difficult to get public debt as a share of GDP falling.
Trade war consequences are showing
Boris Kovacevic – Global Macro Strategist
The US dollar followed Treasury yields lower on Tuesday, ending a four-day winning streak. Weak economic data and trade-related uncertainty continued to weigh on sentiment. Equities managed to hold onto modest gains, though early enthusiasm faded into the close as investors digested fresh signals of a slowing consumer and growing concerns over trade policy. This means that the Greenback is still on track for its worst month in over a year at a drawdown of 3.2%.
Hopes that Trump’s tariffs would boost US growth have been replaced by fears of stagflation and recession, with investors increasingly skeptical of the administration’s economic strategy. Consumer confidence took a significant hit in March, with the Conference Board’s index dropping to 92.9, its lowest level in four years. The expectations component was particularly weak, plunging nearly 10 points to a 12-year low. Households appear to be growing more anxious about rising prices and deteriorating economic conditions.
Fed officials, meanwhile, continue to emphasize caution. Governor Adriana Kugler noted an uptick in inflation expectations alongside rising goods prices, underscoring the central bank’s reluctance to ease policy in the near term. Her comments suggest that policymakers remain wary of cutting rates too soon, particularly as recent inflation surprises keep the risk of price pressures alive.
At the same time, uncertainty around the scope and implementation of US tariffs is keeping markets on edge. Trump hinted on Monday that some of his planned levies may not go into effect on April 2, fueling speculation that the administration could adopt a more flexible approach. However, the president’s latest move to introduce “secondary tariffs” on nations purchasing Venezuelan oil adds another layer of unpredictability to US trade policy, raising concerns about broader diplomatic and economic repercussions.
More short-term pain for the euro
George Vessey – Lead FX & Macro Strategist
Although the euro is under pressure of late, supportive fiscal and monetary policy should make for further gains in the future, or at least partially offset the blow from US tariffs on the Eurozone. Investor confidence and Eurozone business activity are improving, driving bond yields higher, but the reality is that FX traders are cautious ahead of Trump’s upcoming tariff deadline next week, especially given the euro’s on track for its biggest monthly gain in over two years – hence profit taking likely.
The ongoing nervousness amongst market participants regarding Trump’s reciprocal tariffs could keep safe havens, including the US dollar in high demand over the next week. As with many policy processes under Trump, the situation remains fluid and no decision is final until the president announces it. However, front-loaded fiscal policy in the wake of the historic German stimulus plans, could help cushion the economic impact of tariffs, and therefore limit downside risks for the euro. But euro upside may be priced in already to a certain extent.
Positive signs are emerging though. Germany’s most prominent leading indicator, the Ifo index, increased in March to 86.7, from 85.2 in February, its highest level since July last year. While business expectations surged to 87.7, from 85.6 in February, following the historic debt deal. The current assessment component improved somewhat but remains close to recent lows. Combining the latest confidence indicators with available hard data suggests that the German economy has bottomed out in the first quarter of the new year, even if it’s too early to call an end to stagnation.
Meanwhile, in the equity space, Germany remains favoured, as 70% of respondents in Bank of America’s fund manager survey last week, identified German stimulus as key to European growth. The German benchmark DAX index has already outperformed all European peers as it stands to benefit from increased fiscal spending, particularly in cyclical sectors like industrials and chemicals.
Dollar, oil and stocks on top
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 24-28
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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