By: John Kicklighter, Head of Market Research
Talking Points:
The crack in market confidence to close this past week opens the door for collective sentiment to consider systemic fundamental maters for greater control over our general course setting. While there are a number of competing macro themes to consider against a run of high profile event risk that can tap into those different matters, underlying liquidity should be an equally important consideration in our gauging how the speculative compass will direct going forward. The end of the first quarter (and start of the second) will generate predicable fund rebalancing efforts which can result in volatility and short-term redeployment of capital.
Chart of S&P 500 and 1-Week Rate of Change (Weekly)
Source: John Kicklighter, Standard & Poor’s
Should all other fundamental themes hold their course, any anti-trend moves may be short lived and we can find ourselves right back in the underlying currents – whether driven by complacency or some outlier macro theme. However, volatility has a tendency to sharpen the markets focus and bring to the surface suppressed concerns. Should the scales shift during this transitionary phase, temporary displacement could turn into a lasting trend reversal that has the capacity for true moment. Please note that trading during times of extreme volatility can be risky and is not suitable for all investors.
Calendar of Top Global Macro Event Risk
Source: John Kicklighter
While we assess the backdrop for liquidity and capital allocation, what are the tangible fundamental cues that we should monitor for potentially stoking more rooted fundamental themes? Going chronologically, Monday’s release of Chinese PMI figures for March (proxy for GDP), German inflation for ECB speculation and Japanese capital spending trends will all be influenced by the liquidity waver Monday to Tuesday. After markets return to their full status, Tuesday will bring (among other readings) the ISM manufacturing report.
Typically, I keep tabs on the group’s service (non-manufacturing) update, which occurs on Thursday, because it represents a far larger segment of economic output and employment for the world’s largest economy. Yet, at this point, the focus on trade wars may set a brighter spotlight on the manufacturing are of the US economy. That is the arena that is targeted for rebalancing global competitiveness, but it is also the area most likely to feel the blowback of retaliation and higher inflation. As it stands, the new orders reading in February had already dropped meaningfully and inflation swelled aggressively. Both components are expected to see further extension on those unfavorable trends with the March update. If that comes to pass, be mindful of the perceived balance of risk-reward from the escalating trade wars.
Chart of US ISM Manufacturing, New Orders, Prices Over S&P 500 (Monthly)
Source: John Kicklighter, ISM Manufacturing Survey
On Wednesday, the date that President Trump has been hyping for a number of weeks will be upon us. The President floated the concept of reciprocal tariffs back in February, and the official start date has been penciled in for April 2nd for the past few weeks. ‘Liberation Day’, as it is being dubbed, is due to trigger a reactionary run of import taxes on a number of countries and goods. As has been the norm in the 2025 trade war (as opposed to the 2018 effort), delays and caveats are likely for various products. On the one hand, the US is almost certainly to going to trigger onerous trade barriers against trade partners from Canada to China to the Eurozone.
On the other, the market may already have discounted much of the atypical event’s ultimate impact, which could make the more market-moving consideration the caveats that are announced. As unusual as the market’s response to this systemically important disruptor has been, there is a greater degree of uncertainty around how it will play out and just how significant the long-term impact will prove. This is not an area where complacency will present a favorable, much less reliable, risk-reward situation.
Chart of DXY Dollar Index with Tariff Updates and VIX Volatility Index (Weekly)
Source: John Kicklighter, TradingView, CME and Standard & Poor’s
Pushing aside event risk like the US and Canadian trade balances, Japanese household spending and the New York Fed’s supply chain pressure index; the top event risk in the latter part of the week is arguably the March change in US nonfarm payrolls (NFPs). This particular indicator has a multi-decade history as the most market-moving global macro event risk. That provides recognition. As market participants tune in, they will be considering the indicator’s Fed influence for rate expectations. The US central bank has a dual mandate, targeting full employment and steady inflation (targeted around 2 percent).
This past week, the PCE deflator – the FOMC’s preferred inflation measure – ticked higher, tipping the balance of stability away from easing which they pursued towards the end of 2024, That said, the efforts by DOGE to cull federal jobs could have an outsized impact on what March’s figures deliver. A strong employment figure (NFPs, jobless rate, wages, etc) could lift the rate forecast for 2025 away from any further cuts and maybe even set the tone for further out rate hikes. Alternatively, weak employment against tightened inflation could threaten a particularly pernicious environment: stagflation. And, the academic monetary policy texts consider that scenario one of the worst possible mixes to navigate back to correct.
Chart of US Unemployment Rate and Core CPI (Monthly)
Source: John Kicklighter, Bureau of Labor Statistics
-- Written by John Kicklighter, Global Head of Content
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