Stocks End Volatile Week Higher
Stocks are on track for weekly gains following some mid-week relief on the tariff front, but selling in U.S. Treasuries and the U.S. Dollar adds to elevated uncertainty.
The Week That Was
If you read last week’s blog you might recall that my forecast for this week was “Breakout”, which I defined as a greater than 2% move in the S&P 500 (either higher or lower) on a week-over-week basis. At the time of this writing the S&P 500 is up roughly 5% on the week, and while the forecast turned out to be accurate. Given the recent volatility I understand this forecast isn’t necessarily a bold call, but it’s extremely difficult to make a directional call in this highly uncertain, headliner driven stock market. This week’s gains were driven by a selling crescendo on Monday down to a key technical level (more on this in the “Technical Take” section below), and more so, Trump’s decision to put a 90-day pause on “reciprocal” tariffs on Wednesday. The temporary reprieve still sets a 10% tariff on countries and excludes China, which currently has a 145% tariff in place. Markets are hoping that this “grace period” will give countries enough time to hash out trade deals with United States. The other issue for stocks is the tariff escalation that is still underway between the United States and China.
Also confounding U.S equities is the recent sharp drop in the U.S. Dollar and strong push higher in Treasury yields. 10-year Treasury yields are up over 50 basis points this week and the DXY briefly traded below the key 100 level earlier today (more on this in the “Technical Take” section below). Earlier today Boston Fed President Susan Collins said the Federal Reserve “would absolutely be prepared” to help stabilize financial markets if conditions become disorderly. Treasury yields turned lower, and stocks moved higher following the news, though the price action remains tentative. What seems to be troubling investors is that U.S. Treasuries and the U.S. Dollar have historically been “safe haven assets” during times of financial turmoil. It’s also worth noting that we got two cool inflation reports this week, but Treasury yields moved higher anyway. It’s too early to say whether the weakness in U.S. stocks, bonds and currency will persist over, but it seems clear that the developments are related to the recent shock to global trade.
Outlook for Next Week
At the time of this writing (3:20 PM ET), all the major indices are near the highs of the session (DJI + 639, SPX + 97, COMP + 326, RUT + 25), which appears to be mostly driven the statement from Susan Collins that the Fed stands ready to provide support. What remains unclear at this point however is what the Federal Reserve would define as a “disorderly” market. Next week we’re going to get an influx of Q1 earnings reports, but I think the results/guidance will take a backseat to any potential tariff negotiations and movement in the bond market. Any significant move higher in Treasury yields will obviously be disruptive to equity markets and the longer that it takes to get any trade deals will likely be incrementally bearish. On the technical front, if the SPX is able to push higher next week it will be interesting to see if it can make a push above near-term resistance around 5,500 (more on this in the “Technical Take” section below). Like last week, I find it difficult to make a directional call due to so many unknowns, and therefore my forecast for next week is “Breakout”, which I define as a greater than 2.0% move, either higher or lower, by next Friday.
Other Potential Market-Moving Catalysts:
Economic:
– Monday (4/14): no report
– Tuesday (4/15): Empire State Manufacturing, Export Prices, Import Prices
– Wednesday (4/16): Business Inventories, Capacity Utilization, EIA Crude Oil Inventories, Industrial Production, MBA Mortgage Applications Index, NAHB Housing Market Index, Net Long-Term TIC Flows, Retail Sales
– Thursday (4/17): Building Permits, Continuing Claims, EIA Natural Gas Inventories, Housing Starts, Initial Claims, Philadelphia Fed Index
– Friday (4/18): no report
Earnings:
– Monday (4/14): Goldman Sachs Group Inc. (GS), MT&T Bank Corp. (MTB), Pinnacle Financial Partners Inc. (PNFP)
– Tuesday (4/15): Johnson & Johnson (JNJ), Bank of America Corp. (BAC), Citigroup Inc. (C), PNC Financial Services Group Inc. (PNC), Albertsons Companies Inc. (ACI), Interactive Brokers Group Inc. (IBKR), United Airlines Holdings Inc. (UAL), J.B. Hunt Transport Services Inc. (JBHT)
– Wednesday (4/16): ASML Holding NV (ASML), Abbott Laboratories (ABT), Prologis Inc. (PLD), US Bancorp (USB), Travelers Companies (TRV), CSX Corp. (CSX), Rexford Industrial Realty Inc. (REXR), Alcoa Corp. (AA)
– Thursday (4/17): United Health Group Inc. (UNH), American Express Co. (AXP), Charles Schwab Corp. (SCHW), Truist Financial Corp. (TFC), DR Horton Inc. (DHI), Fifth Third Bancorp (FITB), State Street Corp. (STT)
– Friday (4/18): Comerica Inc. (CMA)
Economic Data, Rates & the Fed:
Markets received a solid dose of economic data this week, which included the monthly inflation reports (CPI/PPI). The good news (for the bulls) is that the inflation reports came in cooler than expected, aided by a large drop in gas prices. On the other hand, the reports did little to thwart this week’s surge in bond yields. Also worth noting, although this morning’s University of Michigan Consumer Sentiment report is “soft ” data, inflation expectations ramped up to multi-decade highs. Here’s the breakdown from this week’s reports:
NFIB Small Business Optimism Index: Declined by 3.3 points month-over-month to 97.4. The Uncertainty Index decreased 8 points from February’s (second highest ever) reading of 96.
Mortgage Bankers Association (MBA) Mortgage Applications Index: Increased 20% from the prior week.
Consumer Price Index (CPI): Headline month-over-month (MoM) declined 0.1% vs. expectations for a 0.1% gain. The headline year-over-year (YoY) gain was +2.4%, below the +2.6% expected and down from +2.8% in February.
Core CPI: Increased 0.1% MoM, which was below the +0.2% expected. On a YoY basis the core increased 2.8%, below the +3.0% expected.
Producer Price Index (PPI): Headline month-over-month (MoM) declined 0.4% vs. expectations for a 0.2% gain. The headline year-over-year (YoY) gain was +2.7%, below the +3.3% expected and down from +3.2% in February.
Core PPI: Decreased 0.1% MoM, which was below the +0.3% expected. On a YoY basis the core increased 3.4% from 3.2%, but below the +3.6% expected.
University of Michigan Consumer Sentiment: Fell to 50.8 from 57.0 in March and below 53.5 expected, representing the weakest reading since June 2022.
Consumer Credit: -0.8B vs. $12.0B expected. Within the report, 1-year inflation expectations jumped to 6.7% from 5.0% in March, representing the highest level since November 1981.
Initial Jobless Claims: Increased to 223K from 219K in the prior week, but in-line with economist expectations. Continuing Claims decreased 43K to 1.85M from last week.
The Atlanta Fed’s GDPNow “nowcast” for Q1 GDP was revised up to -2.3% on Wednesday from -2.8% on April 3rd.
This week’s push higher in bond yields is the story of the week aside from the tariff pause. The rally was more pronounced at the longer dated maturities, resulting in a steepening of the yield curve. Where the bond selling is primarily originating from has been a popular topic this week with some analysts suggesting that it is due to a combination of higher longer-term inflation expectations, hedge fund selling (to cover losses from equity exposure) and potentially foreign holders due to global trade uncertainty. Compared to last Friday, 2-year Treasury yields are up nearly 30 basis points (3.949% vs. 3.664%), 10-year yields rallied more than 50 basis points (4.513% vs. 3.985%) and 30-year yields are up nearly 50 basis points (4.905% vs. 4.418%).
Expectations around potential rate cuts from the Fed moved lower this week, primarily driven by commentary from a couple of Fed officials who stated that inflation was the primary focus as policy driver, second to any potential economic slowdown related to the tariffs. Per Bloomberg, expectations for a 25 basis point cut at the May FOMC meeting are currently 24% from 43% last week, with a theoretically 100% chance of a cut at the June FOMC meeting. Note: There is no FOMC meeting in April.
Technical Take
S&P 500 Index (SPX + 25 to 5,293)
It was another volatile week for the S&P 500 (SPX) and which included a couple significant technical developments. First, on Monday the SPX was on track for its third consecutive day of 4%+ losses but the index was able to find some bid support and ended up closing near the flatline by the end of the day. The SPX intraday low that day was 4,835, which was right at the 50% Fibonacci Retracement level from the October 2022 lows to the February 2025 highs. Next, the Relative Strength Index (RSI) registered an extremely (near-term) oversold reading of 23, which is the lowest level since the March 2020 Covid lows. Lastly, Wednesdays near 10% single-day rally took the index very close to the ~5,500 level, which was the March 13th low. Therefore, 5,500 is the first key level of resistance on the upside and 4,835 is the first key support level on the downside. I know that is an extremely wide range, but it reflects the massive volatility witnessed since the last Wednesday’s Liberation Day. Aside from those two levels, it’s really hard to get a sense of which direction the index will go next week without knowing what will happen with tariff negotiations and Treasury yields.
Near-term technical translation: breakout (meaning >2.0% move higher or lower by next Friday)
Source: ThinkorSwim trading platform
Past performance is no guarantee of future results.
U.S. Dollar Index ($DXY + 0.40 to 100.11)
The DXY measures the strength of the U.S. Dollar versus a basket of other major currencies. As you can see in the chart below, the Dollar has lost a lot of ground since around President Trump’s Inauguration Day and the weakness has intensified since last Wednesday’s tariff impositions by the United States. A weaker Dollar isn’t necessarily negative for U.S. stocks, but the velocity of the move can be jarring to markets. Historically, the U.S. Dollar has been a safe haven asset when there is stress in the financial markets, so the move lower, along with U.S. stocks and U.S. Treasuries has market pundits a bit perplexed. From a technical perspective, in my view if the DXY can hold above the 100 (support) level this would suggest near-term stability and likely supportive for U.S. stocks. Therefore, although tariff negotiations and Treasury yields are the primary market drivers, if the DXY can hold up above the 100 level this would net-net be conducive for equity bulls.