Markets Remain on High Alert for Upside Catalyst

Volatility continues to rule the investing landscape, with tariff crosscurrents, conflicting soft and hard economic data, little, if any, forward corporate guidance, a President ticked off at his Fed Chairman and a first-quarter earnings season that has so far offered glimmers of hope that a recession is not in the cards. It is so fluid that no one can blame investors for wanting to maintain a lower market weighting and hold some powder, but at the same time, no one wants to be out of the market if Trump and Xi decide to start negotiations and the market rallies 5-7% in reaction.

Consumer surveys are downright negative, reflecting fears around inflation being restoked and job security. Of the Fed governors that have publicly spoken about tariffs, the consensus is that they are net inflationary, with Jerome Powell being last week’s spokesperson in this position. Trump has no friends here, especially with his latest comments. It is no secret that the Fed’s 50-basis-point cut in front of the election is seen by Trump as the Fed playing politics, but at the time, the unemployment data softened, and the downward revisions of the prior month and year were a bit alarming.

As the job market did not fall apart, recent weak consumer surveys point to some traditional concerns about future job security as well as a new one — artificial intelligence (AI) replacing multiple lines of work. The probability of a higher unemployment rate within a year surged to 44%, the highest level since April 2020. About 15.7% of respondents expressed concerns about losing their jobs in the next year. Inflation expectations have risen, and pessimism about household finances and income growth has increased. And again, ongoing trade wars and tariffs are fueling inflation concerns and adding to economic unpredictability.

To the consumer’s credit, these are all very legitimate concerns. However, despite these concerns, and the financial media talking up recession and stagflation, the broader economy and job market have shown resilience. But the pessimistic outlook could impact consumer spending and business investments, characterized by a “wait-and-see” attitude that exemplifies a typical herd mentality.

One indicator investors should be watching like a hawk is the weekly jobless claims data, which tends to track the labor market in a more real-time sense. Considering that many of the tariff details were announced in early March and went into full effect earlier this month, one could argue that employers would have taken some early actions and tightened their workforces as a precaution.

Conversely, the latest weekly initial jobless claims for the week ending April 12 decreased by 9,000 to 215,000 (Briefing.com consensus 225,000), with the four-week moving average also trending lower. For now, the labor market looks intact and healthy.

It is crucial that the 10-year Treasury market also maintains a healthy-looking chart. The yield on the benchmark 10-year closed last week with a 4.33% yield, down from 4.60% where Powell and other Fed officials recently addressed concerns about banking liquidity, emphasizing that markets are functioning as expected despite heightened uncertainty.

Powell noted that the bond market remains orderly, and there is no immediate need for intervention. He also highlighted the importance of maintaining price stability to ensure long-term economic health. This comes off as a bit odd, considering the 90-day pause was announced the same day corporate bond spreads were widening out sharply, when the market was anything but stable.

In any case, seeing the 10-year moving lower again last week was a positive development, and the investment grade corporate debt market has also firmed back up to some extent with more work to be done, especially in the junk bond arena. Building on this recent recovery in the fixed income market will depend heavily on the economic calendar in the next two weeks.

Key reports for investors to hone in on include S&P Global Manufacturing and Services PMI for April, Initial Claims for the week ending April 19, Conference Board Consumer Confidence, Advanced GDP for Q1, ADP Employment Change, Personal Consumption Expenditures (PCE) Prices, Non-Farm Payrolls, Factory Orders, Consumer Price Index (CPI) and Producer Price Index (PPI) for April and Retail Sales for April.

All this data leading up to the May 7 Federal Open Market Committee (FOMC) meeting, and the fact that the tariff wars will be closing in on a full month of activity, will likely make for another two weeks of market turbulence. Over the next two weeks, many of the companies that matter the most to the market’s plumbing will be reporting Q1 results and talking about the current state of business conditions with zero expectations of forward guidance.

Without a doubt, come May 7 when the Fed meets, they and investors will have a higher degree of clarity regarding the current state of the economy and the state of the tariff situation. The soft data has put the market on its heels. It is now up to the hard data to prove the recession and stagflation camps wrong, and time will soon tell.