Mini Market Lookback: The Next Trade Battle Fast Approaches

The week saw painful stock swings and a HY spread gap as tariffs fire a volley with the heaviest ammo ahead on “Liberation Day.”

Mar 29, 2025

Those who are about to retaliate with tariffs salute you.

A warmer-than-expected Core PCE reading and more brutal erosion of consumer sentiment/confidence metrics show soaring inflation expectations after a series of notable downward revisions in US GDP forecasts (Fed, OECD).
We see a growing tally of downward earnings revisions with 1Q25 earnings season getting closer with the corporate management teams less able to duck the tariff questions as the detail transparency is more specific for many industries and countries. There is still a lot of room for estimate games.
The reciprocal tariff methodology (mythology?) will leave enough room to drive a fleet of trucks through even as the reality of the moment is that Trump has taken on the mantle of tariff dictator. He can use legacy legislation to do whatever he wants on tariffs while the congressional sheep keep grazing. The Section 232 pipeline could even lead to no transparency if history holds true to form and “Executive Privilege” gets invoked again on the 232 reports.
This coming week brings JOLTS and payroll numbers, and that will add input to where any retrenchment will flow into the jobs numbers and possibly raise more hope for a Fed easing.

The above time series is worth a look with the S&P 500 framed against some benchmark ETFs for Europe and Canada. We look at the YTD returns for the three regions, and the S&P 500 is pulling up the rear.

The markets are not impressed with the game plan on tariffs and deportation and the need to generally scare a broad cross-section of the consumer base and corporate capital budgeting planners. Consumer sentiment and confidence tanking is not a coincidence.

For some, the brief setback is arguably not a problem that some trade wars wouldn’t clean up if properly paired with a serving of military annexations. Those would naturally need to be planned over a Signal group chat ahead of a few bombing runs enhanced by some well-placed emojis.

The past week was a rough ride for risky assets with the group of 32 benchmarks we track posting a score 9-23 with the low-risk Consumer Staples ETF (XLP) at #1 and the Tech ETF (XLK) in dead last. Auto tariffs lit up the headlines.

A notable takeaway in the mix was the large cap benchmarks (NASDAQ, S&P 500) and small cap Russell 2000 in the bottom quartile with Midcaps (MDY) able to get into the lower half of the third quartile. The Equal Weight NASDAQ 100 (QQEW) was also a guest for the week in the bottom quartile with the Communications Services ETF (XLC). Rounding out the lowest tier mix was EM Equities (VWO) and Base Metals (DBB).

Income proved a reliable game plan with the Midstream Energy ETF (AMLP) and BDC ETF (BIZD) at #2 and #3. The short UST 1-3Y ETF (SHY) made the top quartile with the broad Energy ETF (XLE) and E&P (XOP) also in the top tier joined by the increasingly volatile Consumer Discretionary ETF (XLY) with Tesla seeing a rebound week at almost +6%.

The bond ETFs saw 5 of 7 in negative return range as longer bonds moved higher and credit was being undermined by some spread widening. As we cover further below, the push-pull debate around stagflation fears and flight-to-quality have kept the short end of the UST stable. The long duration UST ETF (TLT) only beat EM Sovereigns in total return with the long UST higher.

As already discussed in other commentaries this week, consumer metrics have been under the gun and notably with respect to rapidly rising inflation expectations (see PCE Feb 2025: Inflation, Income, Outlays 3-28-25, 4Q24 GDP: The Final Cut 3-27-25).

The tech bellwethers are spread out for the week but with 6 of the Mag 7 in the red with the major chip names (NVIDIA, Broadcom, and Taiwan Semi) sitting on the bottom. TSLA had a big week at +5.97% but is still at -10.0% for the trailing 1-month period and -39% for 3 months. Musk’s DOGE stint has not proven to be a consumer aphrodisiac for a reason, and the markets are more hesitant to embrace a stratospheric multiple not tied to the auto business but more linked to the hope for a better tomorrow in genius land.

The 1-week UST deltas are broken out above, and we see the 10Y and 30Y higher vs. the 2Y lower. The most notable move might be what did not happen since the 3M did not move in either direction whether on flight-to-quality or on a disappointing PCE report. We will take that as being the market in a quandary over stagflation risk. The odds for a May FOMC action is now just over 81% for status quo (per CME FedWatch) while June is 65% for a -25 bps cut. The reaction to tariffs and consumer setbacks in April and May will be on the front burner (for analysis and mis/disinformation).

The above chart updates the YTD bull flattener with the 2Y to 10Y shifting lower even if still well above the Sept 2024 lows (see Footnotes & Flashbacks: State of Yields 3-16-25, UST Yields: Sept 2024 UST in Historical Context 2-27-25).

The above time series updates the Freddie Mac 30Y mortgage benchmarks vs. the 10Y UST in what was a quiet week for both with mortgages barely moving.

HY spreads took a beating on the week with a +26 bps move wider to +347 bps including +20 bps of that on Friday. That takes the YTD widening in HY to +55 bps with +60 bps of that over the past month.

The market went through another round of quality spread decompression the past week with “HY minus IG” OAS differentials +24 bps wider to +253 bps which is still well inside the long-term median of +325 bps. IG spreads are still in the double-digit area of what would be more like a credit cycle peak while HY is showing some nerves.

With the notable exception of the systemic bank crisis of 2007-2008 when trouble radiated out from the center of the credit spectrum with the banks/brokers, the spread decompression usually starts in the B and CCC tiers. Back in late 2007, the trouble spread with a vengeance once credit contraction was in evidence. Quality spread widening more typically comes from the bottom tiers up, and we need to be alert for more coming.

The “BB OAS minus BBB OAS” quality differential also moved wider by +19 bps with the BB tier moving +22 bps to +221 bps and BBB tier only by +3 bps to +117 bps. This comparison above frames the largest IG tier against the largest HY tier of BBs where both IG and HY investors spend a lot of time.

Auto Tariffs: Questions to Ponder 3-28-25

4Q24 GDP: The Final Cut 3-27-25

Durable Goods February 2025: Preventive Medicine? 3-26-25

New Homes Sales Feb 2025: Consumer Mood Meets Policy Roulette 3-25-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

Footnotes & Flashbacks: Credit Markets 3-24-25

Footnotes & Flashbacks: State of Yields 3-23-25

Footnotes & Flashbacks: Asset Returns 3-23-25

Mini Market Lookback: Fed Gut Check, Tariff Reflux 3-22-25

Existing Homes Sales Feb 2025: Limping into Spring 3-20-25

Fed Action: Very Little Good News for Macro 3-19-25