Even though U.S. equities finished the week on the upswing, it was a decidedly risk-off week overall. While the S&P 500 slid by 1%, the Nasdaq 100 fell by 3% and long-term Treasuries rose by nearly 3%. It’s the best stretch of outperformance for government bonds since the yen carry trade unwind in the 3rd quarter of last year.
Even though investors may search for green shoots in the current pullback, the macro data suggests that the U.S. economy is indeed slowing down. Composite PMI indicates that the slowdown is about two months and it’s being led by a contraction in the services sector, something that hasn’t happened in more than two years. Given how important the services sector has been throughout the post-COVID recovery, a breakdown in this area of the economy could be very consequential.
The tone out of Washington remains negative, at least as it pertains to the U.S. economic outlook. Trump has indicated that he plans on pushing forward with tariffs (Canada and Mexico are scheduled to get enacted after a one month delay) or expanding on existing ones (another 10% for China on top of what’s already been put in place). Outside of the obvious inflationary potential of these tariffs, they’re also likely to begin slowing down economic growth, depending on their breadth and depth.
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