Weekly house view | Stagflation fears

The week in review

Stock markets fell last week, and volatility surged on uncertainty over President Trump’s tariff and cost-cutting measures. A deteriorating economic picture in the US added to the unease, with stagflation fears fuelled by signs that core price pressures are proving stubborn even if headline inflation is softening, while growth slows. A US government shutdown was avoided, but trade tensions escalated with tariffs on aluminum increased to 25% and expanded to cover more products. Canada and the EU retaliated with tariffs on US goods. Against this backdrop, the US consumer outlook darkened with two of the biggest US airlines slashing their forecasts and a host of major retailers warning of consumer weakness ahead. The S&P 500 duly fell 2.2% on the week as hedge funds accelerated their unwinding of positions they had taken on “US exceptionalism”, leading to the largest two-day deleveraging in four years. Doubts about the extent of purported savings in US government spending drove gold prices above USD3,000 during the week, while the VIX volatility index is up over 95% in three months. In Europe, German political parties agreed a plan to boost spending. Bund yields rose to 2.89% on the German fiscal plan and the Stoxx 600 outperformed the US market by losing 1.1%¹. In credit markets, European high yield spreads fell below US spreads for the first time in two years.

Geopolitics

Ukraine consented to a US 30-day ceasefire proposal. Russian President Putin said he supported the idea but that it needs “detailed work”.

Key data

Annual US inflation fell more than expected to 2.8% in February, down from 3% in January, but core goods prices rose for the second consecutive month. The University of Michigan Survey of Consumers for March posted a reading of 57.9, a 10.5% decline from February as worries intensified over inflation.

The UK economy shrank by 0.1% month-on-month in January, a drop driven by contraction in the industrial and construction sectors.

In China, the CPI index fell in February into negative territory for the first time in 13 months, while China’s central bank said it was looking at creating more tools to support innovation, consumption, and exports.