Michael Reinking:
Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Every week we are here to keep you up to date on key trends and events driving global markets, and there is no shortage of topics to discuss. So, let's dive into this week's Market Storylines. Now, over the last couple of weeks, we've been noting the pickup of volatility in U.S. equity markets, that has continued and gotten worse over the last week. The streak of 1% intraday ranges in the S&P 500 hit 10 today and coming into Thursday, there have been five consecutive days where the range has exceeded 2%, the longest streak going back to May of 2022 as inflation was peaking. Now, the VIX has been trading in the low to mid 20s throughout the week. Now, if that streak does continue today, hopefully it is to the upside because the S&P 500 is testing its 200-day moving average right around 5730 as we're recording, the first time that we've tested this technical level since October of 2023.
Now, a retest of the September high, the level we broke out from after the August volatility swell is around 5650. So, we are now into some pretty important technical levels. So, what is driving this volatility? It continues to be a mix of an unwind of crowded trades and a very fluid Washington policy, which is creating some concerns that the U.S. economy is hitting a soft patch, which could evolve into something worse. Now, over the last few weeks, we've highlighted the unwind of stocks related to the AI theme and high growth and high multiple stocks. That continues to be the case, but on a broader scale, after years about performance of U.S. markets, which has become known as the U.S. exceptionalism trade, that performance is being drawn into question, and there are some signs that capital is flowing into other markets, which we've noted in past episodes.
Now, part of that can be explained away by valuation differentials or mean reversion, but there are bigger tectonic shifts that are happening, particularly on the fiscal side of things. Now, in the U.S., Elon Musk and DOGE are looking to cut costs out of the system. The administration is preaching fiscal restraint. Now, the opposite is starting to happen overseas. At the end of last year, we started to see China take significant steps to stabilize its economy. This week, the country reiterated its 5% GDP target and fiscal deficit target of 4% of GDP, suggesting there is more to come. Now, there are also some significant changes occurring in Europe. Now, leadership has heeded the warnings from the U.S. administration to step up defense spending. And this week, newly elected, Friedrich Merz, who is expected to become the next chancellor of Germany, announced a proposal for a €500 billion infrastructure fund and plans to loosen budget rules to allow for defense spending to exceed 1% of GDP.
Now, these announcements have sent the euro and local yields sharply higher. Since the start of the month, the euro is up over 4% versus the U.S. dollar, hitting levels not seen since before the election, and the yield on the German 10-year bond is up over 40 basis points. Mind you, there have only been four trading days in this month so far. Now, European equity markets have been outperforming U.S. markets throughout the year, partially related to the composition of the index, which is more value-oriented. But, this is accelerating gains fueled by defense stocks and hope for an economic turnaround with most major local indices up over 10% year-to-date. Now, shifting back to the U.S., some of the volatility this week has been related to the 25% tariffs on Mexico and Canada going into effect after some optimism heading into and coming out of the weekend that they could be averted.
Now, this morning, President Trump announced that Mexico will not be required to pay tariffs on any products that fall under the USMCA agreement until April 2nd when reciprocal tariff announcements are expected to come. Now, this provides some clarity, at least for the moment, but the game of tariff twister will continue for the foreseeable future. Now, as we've been noting for a few weeks, the fluidity of Washington policy and concerns about tariffs have been negatively impacting sentiment surveys recently, which is spurring concerns of an economic slow patch. This week's economic data has been mixed, but on balance, I'd argue that it has been somewhat better than feared. The ISM manufacturing was a bit below estimates, but did hold above the demarcation line of growth. The underlying metrics were disappointing with new orders and employment both falling and the prices components moving higher. However, this week's services PMIs came in better than expected.
Now, recall that some of the growth concerns really started to pick up after the S&P Global Services PMI fell into contraction for the first time in over two years a couple of weeks ago. That was revised higher this week. Now, the ISM services also came in better than expected, though it also showed pricing pressures. Now, tomorrow's jobs report is going to be a very big catalyst. Thus far, the labor market data is mixed. The ADP job survey, which is a survey of private companies, came in at half of the estimates, while the challenger job cuts jumped to 172,000, the highest level since 2020, up from just under 50,000 last month. Now, government cuts accounted for nearly a third of those losses. However, on the positive side, this week's initial jobless claims fell back to 220 after jumping to 241,000 last week. So, the estimate for nonfarm payrolls is around 160,000, up from 143,000 last month. But, that number could be sloppy as we've seen big revisions, weather, wildfire impacts and uncertainty around the cuts in the government.
Now, the unemployment rate is expected to hold steady while wages are expected to show some moderation after a move higher last month. Now, the whisper is for tomorrow's number to be weak. Now, if that is the case, we'll have to see how forgiving markets are. If the report does come in better than expected, this could go a long way in easing some of the growth concerns for the time being. Now, in the afternoon Fed Chair Powell will be speaking, so we'll get to hear a near real-time response by the Fed before they enter their media blackout window. In addition, the White House Crypto Summit will also take place, so expect the volatility in that asset class to continue.
Now, looking ahead to next week, the economic data shifts to inflation with investors increasingly worried about stagflation. Late cycle tech and retail earnings, which have largely been disappointing, will continue. And Friday is also the budget deadline, so we can add headlines about a government shutdown to the mix. Once again, thank you for spending some time with us today. Remember, you can watch Market Storylines on tv.nyse.com or our YouTube channel, or you can listen every Friday on Inside the ICE House podcast feed. Thanks for joining me. I'm Michael Reinking. I hope you have a terrific weekend.
Speaker 2:
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