Weekly Comment: US economic data in the spotlight

Market overview – Richard Carter, Head of Fixed Interest Research

Financial markets are facing heightened levels of uncertainty of late, leading investors to follow economic data more closely for signs of not just where we are going but where we currently are. A notable divergence between “soft” sentiment-based indicators and “hard” economic data has painted a mixed picture of the US economy in recent months. Given that sentiment can change far more quickly than backward-looking economic figures such as unemployment and GDP, questions are growing as to how severe the US slowdown will be. This week’s data could provide some additional clarity in that regard.

Last week gave one of the first signs that “hard” data may be deteriorating in the face of Donald Trump’s trade tariff plans, with the Federal Reserve’s preferred inflation measure rising. The personal consumption index (PCE) rose more than expected, up 0.4% month-on-month compared to 0.3% forecast. More tellingly though, the Core PCE reading increased to 2.8% annually, or 0.4% month-on-month, for the biggest monthly increase since January 2024.

The University of Michigan survey has shown inflation expectations rising sharply in recent months, from 2.8% in its December release to 5.0% in March, and it seems like these expectations are feeding through into reality. At the same time the University of Michigan survey showed consumer sentiment continuing to fall, with its index dropping from 74.0 in December to 57.0 in March. Although retail sales figures have softened, they continue to hold up better than the sharp drop in the survey would suggest.

This week’s ISM manufacturing and Services PMIs will be closely followed, as both have shown little sign of any serious concern in recent months. Employment data has also remained solid and Friday’s non-farm payrolls will be the scrutinised for signs of weakness after holding up pretty well so far. In recent months the jobs report has softened a touch but remains pretty strong on the whole, with a 3-month average of 244k jobs added while the unemployment rate has remained historically low, coming in at 4.1% for February. This has thus far given little cause for concern.  

Stock markets were weak last week in the lead up to 2 April, the day that Donald Trump is expected to announce a series of reciprocal trade tariffs come into effect. There is still little certainty on not only how large these tariffs will be and what will be exempt, but also how long they will be in place for. We’ve seen in recent months how quickly tariffs can be implemented, withdrawn or changed. The main thing investors will be looking for this week is some clarity, as it appears that uncertainty is currently causing at least as much damage, if not more, to stock prices than actual policy. 

Weekly economic announcements:

Last week, the MSCI All Country World Index (MSCI ACWI) lost -1.3% (-0.9% YTD).

The United States:

Several new tariff announcements — including President Trump’s announcement last Wednesday of a 25% levy on all non-US-made automobiles — impacted stocks later in the week, sending major indexes into negative territory.

US large cap stocks posted a loss of -1.5% for the week (-4.8% YTD). Value stocks outperformed growth shares for the sixth consecutive week (-2.6% to -0.4), and large caps outpaced small caps. Technology-heavy stocks fell -2.6% (-10.1% YTD).

The United Kingdom:

British Chancellor Rachel Reeves delivered the annual Spring Statement, confirming a number of spending cuts. The Office for Budget Responsibility (OBR) also halved its UK economic growth forecast for 2025 to 1% and predicted higher unemployment and inflation this year. However, the OBR upgraded its economic growth projections for each year from 2026 through 2029. Also positive was the news that UK inflation came in a touch lower at 2.8% in February, down from 3% in January, keeping alive the possibility of a May interest rate cut.

UK large caps outperformed last week, adding 0.2% (6.7% YTD), while mid caps slid -0.4% (-3.0% YTD). The British pound edged slightly higher against the US dollar, ending the week at US$1.29.

Europe (ex UK):

European stocks rose briefly at the start of the week thanks to encouraging geopolitical news. Early in the week, Ukrainian President Zelenskyy noted that talks between Ukraine and the US had been constructive. This was followed by an announcement on Tuesday of a partial ceasefire between Russia and Ukraine, focusing on a cessation of naval hostilities in the Black Sea and the suspension of attacks against energy infrastructure.

Many major stocks ultimately ended the week lower after Trump announced new 25% tariffs on all autos and auto parts entering the US, taking effect this week. The blanket application was a worst-case outcome for Europe, as hopes had been that certain countries might receive an exemption. The US president subsequently doubled down, threatening further tariffs should the EU retaliate with countermeasures.

The MSCI Europe ex UK Index ended the week -1.8% lower (7.9% YTD). Germany’s large cap index fell -1.9% (12.8% YTD), France’s dropped -1.5% (7.5% YTD), and Italy’s was down -0.7% (13.8% YTD). The euro remained little changed against the US dollar, closing the week at US$1.08.

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