Last week ended with President Trump’s announcement of “likely tariffs” of 25% on autos, semiconductors, and pharmaceuticals. There is no deadline surrounding these proposed tariffs, and the president has not specified targeted countries for levies.
With regards to reciprocal levies, a country-by-country announcement could be made as soon as April. To recap, levies “threatened and deferred” until Mar. 4 are currently as follows:
With his new trade policies, the president is reshaping the supply chain, trade flow, and prices for the American consumer. The U.S. GDP for Q1 is still positive, coming off last year’s growth of 2.8%. The unemployment rate remains at 4%. U.S. jobless claims remain low at 219,000 from last week.
However, last week’s data releases showed a sharp downturn in the consumer sentiment index which dropped from 71.7 in January to 64.7 in February. This was anchored in the consumer sentiment that expects prices to rise at an annual rate of 3.5% over the next five to ten years. The data factors in a near-term rise in inflation.
All the uncertainty surrounding tariffs and inflation directly affects the Federal Reserve. Fed Governor Waller was quoted last week as saying, “Tariffs proposed by the administration on Feb. 1 would have a significant effect on trade and consumption in the first quarter, not to mention prices, but after the postponement of some of those tariffs, it is unclear to me if and when that might show up in data.”
The Fed signals no rush to cut rates any further. That said, we should see core PCE data—the Fed’s favorite measure of inflation—released this Friday to a lower print. The backhanded calculation for core PCE inflation is set to come out to 2.6% on the year through January.
Finally, housing data continues to skew to the negative. Housing starts plunged 9.8% in January and existing home sales fell by 4.9%. Mortgage rates at 7% and historically high prices are making it difficult for Americans to buy a house. Supply of previously owned homes on the market increased by 3.5%. Properties have stayed on the market for 41 days on average, up from 35 days in December and 36 days in January 2024, according to the National Association of Realtors.
CHANGES IN RATES
Yields came down in all tenors of Treasury securities with the 1–10-year slope at 28 basis points.
Interest rates in the municipal market mimicked Treasuries to a lesser extent.
The muni-Treasury ratio were range-bound week over week
Corporate yields were also muted on the week.
With all the tariff talk in Washington, it reminds us of the old Bernard Lewis joke that it’s risky to be America’s enemy, but it can be fatal to be its friend.
Elon Musk’s Department of Government Efficiency (DOGE) has asked federal employees to justify their jobs or face being fired. The Pentagon, the Department of Justice, and the Department of Health and Human Services have asked their employees to pause replying to DOGE.
On the international front, Germany’s conservative center-right Union bloc, led by Friedrich Merz, won Sunday’s federal election. Meanwhile, in Ukraine, President Zelenskyy said he would step down if it meant peace for his country. This was after President Trump called him a “dictator” and asked for new elections in Kyiv.
The 5-year Breakeven Inflation Rate finished the week of Feb. 21 at 2.61%, 1 basis point lower than Feb. 14. The 10-year Breakeven Inflation Rate finished the week at 2.42%, 1 basis point lower week over week.
As of Feb. 21, 10-year quality spreads (AAA vs. BBB) were 0.86%, 9 basis points wider from the prior week (based on our calculations). The long-term average is 1.69%.
Quality spreads in the taxable market are not attractive. They ended the week at 0.80%, 2 basis points wider than the prior week. High-yield quality spreads were 10 basis points wider at 2.60% week-over-week.
Money Market Flows (millions of dollars)
Overall, money market funds saw decreases in inflow led mostly by government money market funds.
Mutual Fund Flows (millions of dollars)
Cash flows into bond funds were mixed week-over-week across most categories.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced an increase in net flows.
The supply of new issues is expected to be closer to $7.6 billion this coming week, compared to the weekly average of approximately $11 billion.
U.S. consumer sentiment and housing data show a softening in “attitude” toward the economy. In actual figures, though, we should see core PCE lower this Friday. Alongside that, we have strong labor market data and a Fed that is taking a wait-and-see approach regarding tariff and trade policies.
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