Mixed economic signals and trade tensions cloud market sentiment
The U.S Federal Reserve (the Fed) kept rates unchanged, exactly as the market expected, leaving the benchmark in the 4.25%-4.50% range. The updated projections showed the committee leaning toward two cuts later this year, but the forecasts remain notably divided. About half of Fed officials foresee only one or even no rate reductions for 2025, reflecting an ongoing debate about the economy’s resilience and inflation trajectory. At the press conference, Fed chair Jerome Powell emphasized heightened uncertainty, particularly due to President Trump’s renewed tariff discussions, which he suggested have directly affected consumer and business inflation expectations. Although the Fed’s statement removed a line about risks being "roughly balanced," Fed chair Powell clarified this change was minor and not intended as a policy signal. Still, the Fed’s cautious stance shows how fragile market sentiment remains amid escalating trade tensions.
In Canada, February’s inflation surprised significantly to the upside, jumping to 2.6% from 1.9% the prior month. The main culprit behind this acceleration was the expiration of a temporary GST/HST tax holiday, which immediately increased prices, especially for food and dining out. On the brighter side, the cost of shelter has moderated further, registering its slowest annual increase since May 2021. The Bank of Canada has already cut rates seven consecutive times in a row. Now, it may face pressure to pause in April, especially given this hotter-than-expected inflation reading. Odds, as determined by the futures market, are at this moment of around a one-in-three chance that we get another cut, but these numbers can change quickly.
Meanwhile, markets moved quietly up through the week. The Empire Fed Manufacturing Index and homebuilder sentiment figures came in sharply weaker, initially suggesting softness. However, traders largely dismissed these misses, instead focusing on a notably stronger U.S. Core Retail Sales report. Thursday provided a similar story—strong home sales data initially boosted equities, but enthusiasm faded by the afternoon. This week highlighted a persistent challenge: investors are caught between soft sentiment indicators, which signal caution, and surprisingly resilient hard data, complicating the market narrative even further.
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