Week ended March 21, 2025: US stocks eke out gains

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty around the economic outlook has increased. The Committee is attentive to the risks to both sides of its dual mandate.” – FOMC press release, March 19th 2025

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This past week was characterised by continued variability although US stocks ended the week slightly higher for the first time in five weeks. The week was hinging on Friday’s session, in which stocks opened sharply lower.  However, stocks managed to claw back their losses by mid-day, then went on to eke out a small gain even as investors dealt with $4.7 trillion of options expiring during the session (“triple witching”).  Most investors were focused on the mid-week decision from the FOMC decision (here) delivered on Wednesday, which went largely as expected.

• The Fed did not change the Federal Funds rate, pointing to a combination of ongoing resilient economic data. However, the Fed did acknowledge uncertainty with respect to the way forward due to fiscal policy uncertainty, but emphasised that economic data remained supportive.

• Four specific areas of concern (or unknowns) were identified by Mr Powell, with the extract below from the Fed chairman’s comments to the press following the FOMC decision illustrating the challenges that the Fed faces in the current uncertain environment: “Looking ahead, the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high.[my emphasis].  As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves.”

• Quantitative Tightening (“QT”) will be dialled back starting in April by reducing its monthly sales of US Treasuries from $25 bln/month to $5 bln/month, providing some further relief to long-term UST yields.

The Fed also released its revised Economic Projections (here), which – not surprising to most investors that follow markets – revised GDP (economic growth) down, unemployment up slightly, and inflation up. These projections, should they come to pass, would mean that the U.S. economy would be heading towards a bout of stagflation, a word bandied around in the press too leisurely for my taste following the Fed meeting, although certainly a term feared by investors.  In fact, I thought Mr Powell was fairly friendly to the administration, noting that any effects of tariffs on inflation would be one-time, or “transitory”.  If the word “transitory” sounds familiar coming from the Fed chairman, it is – remember when Mr Powell said post-COVID inflation would be transitory, not persistent?  It makes me squirm given how wrong the call was a few years back.  You can listen to Mr Powell’s presentation to the press and Q&A following the FOMC meeting here.

One thing that investors agreed on before the meeting which is aligned with the current thinking of the Fed governors is the number of Fed Fund rate reductions coming in 2025, which are two according to the dot plot in the Economic Projections as you can see below (current Fed Funds level is 4-1/4 to 4-1/2).

Investors seemed to believe that the FOMC meeting and its aftermath were slightly dovish as it all unfolded.  However, reality seemed to set in by Thursday morning, with the Fed’s downward revisions in the US economic outlook causing investors to reassess the path forward, leading to a weak trading session. The Fed’s revisions to its economic outlook and ongoing uncertainty with this administration’s policies remains generally negative for risk assets.

Outside of the US, the Bank of England did not change its policy rate at its Monetary Policy meeting on Thursday (press release here), mentioning uncertainty due to the effect of tariffs on the global economy.  Currently, the Bank Rate is 4-1/2%.  Investors and pundits expect two 25bps reductions in the Bank Rate this year.  The Bank of Japan also held steady on Wednesday, leaving its policy rate at 0.5%.  The BoJ mentioned the same reasons for holding steady as the BoE, alluding to April 2 as a key day (when the Trump Administration is expected to invoke broad-based tariffs).  You can access the BoJ Statement of Monetary Policy here.

MARKETS LAST WEEK

Japanese equities were the best performing stocks last week, and Chinese equities were the worst.  US stocks performed well enough to eke out gains for the week for the first time in five weeks.  The technology-heavy NASDAQ continues to be the worst performing US index YtD (down 7.9%), even though it eked out a small 0.2% gain for the week.  The decline in the once mighty Mag 7 names has been a major drag for most US stock indices this year, with none of the indices affected worse than the NASDAQ.  Relatively speaking, it is the “boring stuff” like DJIA stocks that have been the better performers YtD.  You can see the performance of Mag 7 stocks YtD vis-à-vis the S&P 500 in the graphic below from a recent #Bloomberg article.

In the bond market last week, yields were slightly better across the curve as the FOMC decision set the stage for a slight relief rally. Credit spreads also stabilised finally, although they remain under pressure, an inevitable result of the uncertainty of the economic landscape.  Total return UST bond and credit indices were positive WoW.  For me based on my experience, credit is a better indicator of investor sentiment, although less followed and certainly less hyped. 

As far as other assets, gold surged and remained above $3,000/oz, reflecting a flight-to-quality. The US Dollar managed to find its legs and actually strengthened modestly last week.  Oil prices were slightly higher due to increasing uncertainty (again) in the Middle East.  Bitcoin was also slightly better although remains volatile.

At the end of the weekly you will find updated tables in the section "MARKET TABLES".

WHAT’S AHEAD

There is a fair amount of economic data coming this week as March and the first quarter grind to a close, including:

• US: Preliminary PMI data (services and manufacturing) for March (Mon), durable goods orders (Weds), PCE (inflation) data, pending home sales and initial jobless claims on Thursday

• UK: Preliminary PMI data (services and manufacturing) for March (Mon), CPI data for Feb (Weds) and retail sales (Fri)

• Eurozone: Preliminary PMI data (services and manufacturing) for March (Mon), and consumer sentiment data on Friday

• Japan: CPI for March (Thurs)

The Fed talking heads will be out en masse this week following the FOMC meeting last Wednesday.  Upcoming central bank policy meetings are as follows:

• ECB: April 16-17

• Bank of Japan: April 30-May 1

• FOMC: May 6-7

• Bank of England: May 8

MARKET TABLES

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