US equities recovered for the second session on Monday, after a 10% selloff brought the S&P500 to the limit of the correction zone last Thursday. The rebound was backed by the-oversold conditions and mixed retail sales data released yesterday, showing that the retail sales in the US slowed in February but not collapsed. Moreover, the control-group sales, which excludes autos, gasoline, food services, and building materials (because these categories are highly volatile and feed into the PCE and GDP numbers) rose 1%, reversing the 1% slump of the month before. As such, yesterday’s data came to temper the recession calls for the US economy due to the tariff chao. The S&P500 gained 0.64% yesterday and was up by more than 3% compared to the March dip at some point, the Dow Jones advanced 0.85%, while the tech-heavy Nasdaq 100 underperformed with a 0.55% recovery, the Magnificent 7 stocks lost 1%. The loss of momentum among the tech giants and high valuations continue to weigh on appetite as uncertainties loom and growth expectations wane.
Speaking of growth expectations
The OECD released its latest growth forecasts on Monday and they didn’t look pretty. The OECD lowered its 2025 – 2026 growth forecasts for most leading economies, except for China. The predictions were lowered by a similar amount for the European economies than the US economy, Mexico and Canada suffered the biggest slump in growth projections. And the OECD pointed at the tariffs, the global trade restrictions and uncertainties as the main cause of slower global growth, and warned of higher inflation.
Interestingly, the EU military spending plans weren’t taken into account in the OECD numbers as much as they have been priced in by investors. The Select Stoxx Europe Aerospace & Defence ETF for example – including names like BAE Systems, Rheinmetall, Rolls-Royce and Airbus – gained 46% since the beginning of the year, as these companies are expected to benefit from the huge government spending that the EU governments will deploy to compensate the loss of military support from the US. German policymakers will vote today to pass a $500bn spending bill on infrastructure and defence– and if it passes, it will mark a big change regarding the European debt-control measures and austerity of the past decade!
The EU spending prospects sure push the European yields higher, but the prospects of high spending improves the European growth expectations – maybe not at the OECD but among investors – and the latter continues to support the euro’s appreciation against the US dollar.
Plus, there is growing hope that the US’ efforts to broker a peace deal between Russia and Ukraine will be successful – a development that could restore trade relations between Russia and the EU, ease energy prices in Europe and support growth. Trump and Putin are due to speak today.
The Fed
The Federal Reserve (Fed) begins its two-day policy meeting today with soft but not collapsing employment and sales data, softer-than-expected but still near 3% inflation, and a high level of uncertainty and tariff-led volatility in its hands. The Fed is expected to maintain its rates unchanged. The dot plot and Powell’s press conference will be closely watched by investors. Economists predict two rate cuts for the remainder of the year, traders see three. Some analysts also think that pausing the QT could be an interesting move for relaxing the financial conditions without touching the rates. Powell had said in a recent press conference that the US economy remains on a solid footage – a prediction that’s not shared by Atlanta Fed’s GDPNow forecast that warns that the US economy could shrink by more than 2% in the Q1.
A dovish Fed outlook supports further dollar depreciation, while a more conservative stance could hurt growth prospects, also weighing on the greenback. The only thing that could revive USD appetite is an explicit signal from the Fed that it’s ready to step in if economic growth faces a serious threat. Voilà. This sets up EUR/USD for a solid shot at clearing the 1.10 resistance, though overbought conditions could hinder a sustained breakout in the short run.
Buffet loves Japanese stocks
The Bank of Japan (BoJ) is also expected to maintain its rates unchanged when it announces its decision tomorrow. The rise in the Japanese yields have been accelerating along with the European peers since the start of the year. The 10-year JGB yield stands near 1.50% while it was fluctuating around 20 and 60bp this time last year. Shorting the dollar against the yen has been a profitable trade so far this year.
Although the rising borrowing costs and the stronger yen weigh on the Japanese stock valuations, Warren Buffett increased his stake in 5 of Japan’s leading names: Mitsui, Mitsubishi, Sumitomo and Itochu.
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