Weekly Edge: 24-28 March

“Stagflation Light” with Defensive Rotation

Economic Data Recap

United States

• Retail Sales (Feb): +0.2% MoM, rebounding from -0.9% but below expectations of +0.6%.

• Housing Market:

  • Building Permits: 1.456M (slightly below previous 1.473M but above the 1.450M forecast).

  • Housing Starts: 1.501M, beating expectations of 1.38M.

  • Existing Home Sales: Rose to 4.26M, well above the 3.95M forecast.

• Federal Reserve: Held rates steady at 4.5%, in line with expectations.

China

• Retail Sales (Jan–Feb): +4.0% YoY, up from 3.7%, in line with forecasts.

• Industrial Production (Jan–Feb): Slowed to +5.9% YoY from 6.2%, but beat the expected 5.3%.

• 1Y Loan Prime Rate: Unchanged at 3.1%, as expected.

Japan

• Inflation (Feb): Slowed to 3.7% YoY from 4.0%, below the 4.2% consensus.

• BoJ Policy Rate: Increased to 0.5%, in line with market expectations—marking a continued step away from ultra-loose policy.

• Trade Balance (Feb): Surplus of ¥584.5B, a significant improvement from the prior deficit, though below the expected ¥722.8B.

Euro Area

• Inflation (Feb): Fell to 2.3% YoY from 2.5%, slightly better than the expected 2.4%—continuing the disinflation trend.

Canada

• Inflation (Feb): Rose to 2.6% YoY, exceeding the 2.2% forecast, signaling some stickiness in price pressures.

United Kingdom

• Unemployment Rate (Jan): Held steady at 4.4%, in line with forecasts.

• Consumer Confidence (Mar): Improved marginally to -19 from -20, better than the expected -21.

Australia

• Unemployment Rate (Feb): Unchanged at 4.1%, as expected.

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Market Moving Narratives

Based on the global macroeconomic and market developments from last week, we have cherry picked the top 5 narratives driving investor sentiment and asset prices:

“Trump Tariff Turmoil 2.0” and the Looming Trade War Risk

Anticipation of the April 2 reciprocal tariffs under President Trump’s “Liberation Day” agenda has become the dominant macro risk narrative. Market participants are increasingly pricing in the potential for escalating trade tensions—with downside risk to global growth, rising input costs, and possible retaliatory measures. Investor concerns are amplifying amid:

• Surging mentions of “stagflation” in financial media.

• Elevated uncertainty around which countries and sectors will be hit.

• A softening of valuation multiples as a hedge against tail risk. While some bulls still hope for political backtracking under pressure, bearish scenarios (recession or stagflation) are gaining probability.

The Federal Reserve’s Balancing Act Amid Growth and Inflation Risks

The Fed held rates steady at 4.5%, but downshifted growth forecasts and slightly upgraded inflation expectations. This reflects a growing risk of policy mistake: cutting too early in the face of sticky inflation or holding too long and overtightening into weakening growth. Key developments:

• The Fed will slow QT by capping Treasury roll-offs at $5B starting April.

• Real GDP projections lowered to 1.7% (2025), while unemployment forecast was revised up to 4.4%.

• Powell emphasized “uncertainty” repeatedly—a sign of strategic patience, but also hesitance.

Earnings Deterioration and Market Rotation

US equities are at a critical inflection point, with:

• 13 consecutive weeks of net earnings downgrades in the US.

• The "Magnificent 7" mega-cap cohort down ~15% YTD; tech and consumer discretionary underperforming.

• A rotation into high-dividend and foreign equities, especially in Germany and China, as valuation gaps compress. While insider buying has picked up marginally, retail sentiment remains deeply bearish, suggesting fragile support levels.

Resilient but Fracturing US Economy

The US economy continues to show mixed signals:

• Manufacturing is buoyed by auto production and the Philly Fed beat, but capital expenditure plans are turning negative.

• Existing home sales bounced, but inventories are up and affordability is constrained.

• Labor market remains tight with historically low jobless claims, yet wage pressures and insurance costs are weighing on consumer sentiment. The macro picture is one of resilience with cracks forming, raising the stakes for policy missteps or external shocks.

Global Divergences and Capital Reallocation

Macro divergence across regions is driving cross-border capital reallocation:

• Europe: Germany's fiscal expansion boosts outlook; UK muddling through stagnation; SNB cuts stoke deflation fears.

• Asia: Taiwan, Japan, and New Zealand are seeing stronger-than-expected momentum, while China’s FX dynamics suggest hidden stress.

• EM: Brazil’s stocks surged post-hike, Turkey’s markets tumbled amid political risk, and capital outflows from Emerging Asia continue. Investors are increasingly rotating out of high-multiple US equities into international exposures with better valuations and macro tailwinds.