Weekly Edge: 17-21 March

Risk-Off, Dollar Dumps, and Gold Takes the Throne

Economic Data Recap

U.S. Inflation & Consumer Sentiment Cooling

• February CPI rose 0.2% MoM, below the expected 0.3% (prev. 0.5%).

• Core CPI dropped to 3.1% YoY, softer than the 3.2% expected (prev. 3.3%).

• Producer Prices (PPI) stagnated in February at 0.0% MoM, missing the 0.3% forecast (prev. 0.4%).

• Michigan Consumer Sentiment plunged to 57.9 in March, well below the 63.1 consensus (prev. 64.7). And also the Michigan Inflation Expectation survey exploded to the upside; an extreme/political result, but directionally correct.

Europe: Weak Growth, Stable Inflation

• UK GDP shrank 0.1% MoM in January, reversing from December’s 0.4% growth (expected 0.1%).

• Annual UK GDP growth slowed to 1.0%, missing the 1.2% forecast (prev. 1.5%).

• Germany's inflation held at 2.3% YoY in February, as expected.

• France’s inflation cooled to 0.8% YoY (prev. 1.7%), in line with expectations.

China Deflation Deepens

• China’s CPI fell 0.7% YoY in February, below the -0.5% forecast (prev. 0.5%).

Australia: Mixed Signals

• Business confidence deteriorated in February to -1 (expected 6, prev. 4).

• Consumer confidence surged in March to 95.9 (prev. 92.2, expected 92).

Takeaway:

• Disinflation is taking hold in the U.S., with both consumer and producer prices cooling faster than expected.

• Consumer sentiment plunged, raising concerns over demand resilience.

• UK and China show signs of economic weakness, with contractionary UK growth and deepening deflation in China.

• Australia remains divided, with business sentiment weak but consumer confidence rebounding.

Easing inflation supports the case for rate cuts in the U.S. and Canada, while weak UK GDP may add pressure on the BOE. China's deflation and UK’s slowdown highlight global demand risks.

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Influential Narratives

Tariff Turmoil: The Market is Calling Trump's Bluff

Markets are waking up to the reality that Trump's second-term trade war isn't just a negotiating tactic—it's a structural shift. Unlike his first term, where tariffs were a tool to force trade deals, this time around they're a fiscal policy experiment—an attempt to fund the government while reshoring production. The problem? Tariffs are an inefficient tax that raises costs for consumers while doing little to plug fiscal holes. Wall Street is pricing in the risk of a prolonged trade war, with retaliatory tariffs from Europe and Asia likely to escalate. If Trump stays the course, expect continued equity weakness and a shift toward defensive assets.

S&P 500: From “Buy the Dip” to “Wait for the Flush”

The S&P 500 correction has pushed valuations toward a more reasonable level, but the big question remains: is this just a pullback or the start of something worse? Small caps (S&P 600) are already near bear market levels, and the Magnificent 7 are unwinding hard. Corporate earnings are facing downward revisions, and forward P/E compression suggests we are not at the buyable bottom yet. Add in a rising risk premium from political uncertainty, and the smart money is sitting on cash, waiting for a better entry.

Inflation: Easing but Not Enough for the Fed

CPI and PPI both came in softer than expected, but the Fed isn't flinching. Core PCE—the Fed’s preferred inflation gauge—is still sticky, and any tariff-driven price pressures could force them to delay rate cuts. While bond markets have aggressively priced in multiple cuts this year, the Fed is more likely to hold, especially if fiscal and trade policy remain chaotic.

Global Trade Fractures: The Economic Slowdown is Here

• China’s deflation is deepening, confirming weak domestic demand and a lack of external growth drivers.

• The US dollar is off to its worst start of the year in decades, indicating global investors are shifting capital away from USD assets.

• Euro-area industrial production is recovering, and European government bonds are attracting capital as the rate differential with US Treasuries narrows.

• EM credit markets are tightening, as capital flight from riskier assets accelerates amid global slowdown fears.

Credit Markets: Something is Breaking

Widening credit default swap (CDS) spreads in corporate bonds suggest that stress is building under the surface. High-yield is underperforming investment-grade, and leveraged loan returns are slipping—clear signs that funding costs are tightening for weaker companies. If we see a credit event in the coming months, it will likely emerge from middle-market US firms struggling under rising borrowing costs and supply chain disruptions.

Gold and Commodities: The Rotation is On

• Gold near $3,000 signals a rush for hard assets as global uncertainty spikes.

• Crude oil demand forecasts have been revised lower, but OPEC+ supply cuts could keep a floor under prices.

• US natural gas futures are climbing, while industrial metals like copper are catching a bid, suggesting the market sees some industrial resilience despite broader macro weakness.

Takeaway: Markets Have Shifted to Defense

The narrative is shifting from “soft landing” to “policy-driven instability” as Trump’s tariffs, geopolitical tensions, and economic slowdown risks mount. Investors are rotating into defensive assets, watching for the next shoe to drop in credit markets. The S&P 500 correction isn’t over, but select opportunities in commodities and quality defensive stocks are emerging. Stay nimble.

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Momentum Analysis

Trends & Signals

Risk-Off Rotation Intensifies: Weak Equities, Strong Gold

• S&P 500, Dow, and Nasdaq continue to show negative momentum, reinforcing the market's corrective phase.

• Small-caps (Russell 2000) are taking the biggest hit, down almost 3% in the last 4 hours, signaling risk aversion and liquidity concerns.

• Gold remains the standout performer, with momentum accelerating across all timeframes—a clear flight to safety.

• The correlation shift between bonds and stocks suggests the market is no longer treating Treasuries as a hedge, leaving gold and cash as preferred defensive allocations.

Currency Flows Indicate a Shift Away from the U.S.

• Euro, British Pound, and Japanese Yen are all strengthening, indicating capital rotation out of the dollar.

• Australian Dollar is struggling, despite a short-term bounce, suggesting global risk appetite remains low.

• U.S. Dollar's downward momentum aligns with its worst start in decades, as investors recalibrate Fed expectations and trade war risks.

Bond Market Volatility Suggests Uncertainty on Rate Cuts

• Short-term U.S. Treasury yields are rising, while long-duration bonds remain under pressure, suggesting the market is still pricing in uncertainty around rate cuts.

• The 2Y Note's positive momentum is notable, indicating the front-end of the curve is stabilizing, but the overall yield curve remains a challenge for equities.

Commodities: Gold Outperforms, Oil & Copper Hold Up

• Gold is leading the commodity space, benefiting from weaker dollar flows and safe-haven demand.

• Copper’s positive momentum suggests industrial demand remains resilient, although it may be a short-term bounce rather than a new trend.

• Crude Oil remains in a downtrend, reflecting weak global demand, despite supply-side risks.

Bitcoin Stabilizing, But Still Risk-Off

• Bitcoin flipped positive on a 1-day timeframe, but its shorter-term momentum is choppy.

• Crypto remains a secondary risk asset, meaning if equity volatility persists, Bitcoin will likely struggle to establish a clear uptrend.

Strategy for the Week Ahead