Week ended April 18, 2025

“Our obligation is to keep longer-term inflation expectations well-anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension”

Fed Chairman Jerome Powell in discussion with Economics Club of Chicago on April 16, 2025

Investors during this holiday-shortened week were mainly focused on earnings and a mid-week speech by Fed Chairman Jerome Powell, who spoke at The Economic Club of Chicago. The quote to open this update was from his prepared remarks at that event, which is worth watching on YouTube here (consisting of short, prepared remarks but a very interesting Q&A afterwards). Clearly, the Fed is in a bit of a pickle because they have a good idea of what is coming, and recognise the unwelcome possibility that the “direction of travel” could put their two mandates (low inflation and strong jobs) in conflict.

Jerome Powell’s presentation (and Trump’s response)

It’s amusing that President Trump is pointing fingers at Fed chair Powell, who was noncommittal during the Q&A on a way forward simply because of the economic havoc unleashed by the president’s errant economic policies, especially the imposition of blanket tariffs. The reality is that Mr. Trump and his merry team of rather questionable economic advisors are making an absolute mess of the global economy and causing tremendous uncertainty amongst investors. As far as I’m concerned, Chairman Powell is clearly the adult in the room, although I commend Treasury Secretary Bessent for understanding both the value of an independent Fed and maintaining a regular and non-confrontational dialogue with the Fed Chairman. Bessent gets it, but there are clearly questions regarding decision-making and general macroeconomic competency of some of the others in the inner circle, including Navarro, Lutnick and the president himself. Mr Powell and the Fed might not get everything right, but the Fed seems to have a significantly better understanding of the way the global economy works than this administration. Let’s hope that the president’s bombastic talk of removing Mr. Powell comes to nothing. Can you imagine what would happen to financial markets if Mr. Powell to be forcefully removed from his position? Global investors would reject this on a wholesale basis, and the selloff in equities and US Treasuries which would follow would pale in comparison to the swings we experienced earlier this month.

Remember also that the Federal Reserve’s key benchmark rate – the Federal Funds rate – is economically influential and does affect shorter-term US Treasury yields. However, the forces driving the intermediate- and long-end of the Treasury yield curve are less influenced by the level of the Fed Funds rate, at least on a day-to-day basis. Bond investors beyond 2-years or so are currently balancing countervailing forces between a resurgence of inflation (favours higher yields) attributable mainly to tariffs, and a slowing US economy (favours lower yields). Demand and supply factors also play a role, normally borne out during new issue auctions.

ECB monetary policy decision

And speaking of central banks, the ECB as expected reduced its policy rates 25bps at its monetary policy meeting last week. As the ECB stated in its policy decision released on Thursday (here):

“The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions. Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions.”

The ECB is continuing to ease monetary policy as inflation approaches its 2%/annum target, but the central bank is also clearly conscience of the subpar economic growth in the common currency zone likely to be made worse by volatile and highly uncertain US trade policy.

S&P 500 earnings that mattered

As far as earnings, 59 of the S&P 500 companies have now reported, with another 114 teed up for the coming week (see “This Week in Earnings” from LSEG).

The week started with more major US banks reporting on Monday, generally beating expectations across the board with the major benefits attributed to the banks (like Goldman Sachs, Morgan Stanley and JP Morgan) that have large trading operations and have benefited from much higher market volatility. Semi-conductor (chip) companies were also in the news. ASML beat analysts’ consensus earnings expectations and had 42% top-line YoY growth, but new orders during the quarter were less than investors were expecting, sending the stock lower. NVDA then followed the ASML news by saying that restrictions on the sale of a specific already-modified chip to China would be halted by the Trump Administration, causing the company to disclose that the bottom line cost would be circa $5.5bln (estimated $10bln top line). The Reuters press release regarding NVDA is here.

United Airlines (UA) provided forward guidance based on two scenarios – one “normal” and one based on a recession. The heightened uncertainty associated with the Trump administration’s trade policies is likely to cause many companies to withdraw forward guidance all together, logical since it is impossible to tell what might happen day-to-day. However, UA’s two- scenario model for forward guidance might make sense for some companies as opposed to withdrawing guidance all together.

Lastly, NFLX delivered another strong set of earnings, beating expectations on the top and bottom line. Although the results were announced after the bell on Thursday (and Friday was a holiday), the stock traded up sharply in the after-market.

MARKETS LAST WEEK

US equities again stumbled, with most of the damage occurring just after Mr Powell’s event on Wednesday late in the session. Mr Powell was clear is saying that the Fed would ensure markets remain orderly, but that there was no “Fed put” in the offing. The VIX (market volatility index) continues to slowly settle well off its April 7 intraday high of above 60, but well above the levels of the last several years. Global equities again outperformed US equities, with solid gains (albeit “recovery gains” off lows) in Europe and Japan. Pressure lessened in the US Treasury and corporate bond markets, with yields declining and corporate credit spreads stabilising. Gold continued its run, and oil came off of its lows. The Dollar also seems range-bound for the time being in the 99-100 context (vs DX-Y).

See section “Market Tables” below for an update across indices and asset markets.

WHAT’S AHEAD

Economic data that matters this coming week includes the release of April preliminary PMI data for the Eurozone, the UK and the US mid-week, and CPI for Japan for April. Consumer confidence reads will also be released for the Eurozone, the US and the UK. There is a smattering of home sales data also coming in the US. And once again, central bankers in the US (and UK) will be on the speaking circuit.

Earnings for S&P 500 companies continue with 114 S&P 500 companies scheduled to report earnings this coming week, including VZ, GE, BA, T, AAL, MRK, PEP, PG, CL and HCA. The theme seems to be industrial and consumer products companies.

Upcoming central bank policy meetings are as follows:

Bank of Japan: April 30-May 1 (will depend on CPI read this week vs trade uncertainty)
FOMC: May 6-7 (no reduction in Fed Funds rate in May expected, but four 25bps reductions expected this year)
Bank of England: May 8 (declining inflation favours 25bps cut)
ECB: June 5

MARKET TABLES

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