Baker Market Update
2025-03-14

This week, the US bond market experienced notable fluctuations, influenced by escalating trade tensions, recessionary apprehensions, and evolving economic indicators. The yield on 10-year treasury notes exhibited significant volatility. On Monday, yields declined by up to 10 basis points, reaching 4.2%, as investors sought safe-haven assets amid mounting recession fears. However, by midweek, yields rebounded, with the 10-year yield rising to 4.32% on Wednesday. This rebound was partly attributed to a selloff in European government bonds, which exerted upward pressure on U.S. yields. The corporate bond market reflected growing investor caution. Spreads on U.S. corporate bonds widened to their broadest levels in approximately six months, driven by concerns over trade policies, inflation, and potential economic slowdown. Notably, the junk bond spread expanded by 59 basis points since mid-February, indicating heightened risk aversion among investors.

The CPI report for February was released this week. Both the headline CPI and the core, excluding food and energy costs, rose by 0.2% compared with January, undershooting the median estimates of 0.3% for each. Shelter costs rose 0.3%, almost half of the monthly CPI gain – but a notably smaller rise than seen in recent years. Year-on-year inflation came in at 2.8% for the headline, down from 3% in January, and 3.1% for the core – down from 3.3% and the slowest pace since April 2021, when the cost-of-living surge began. Core inflation was propelled by items including medical care, used vehicles, recreation and apparel, while airline fares and new vehicles declined. The drop in airfares added to signs of a downturn in travel demand flagged by carriers in recent days. Stock futures added to the gains after the softer-than-expected inflation print, with S&P 500 contracts up 1.1%.

Headline PPI prints for February were lower than expected, but the Fed’s preferred inflation gauge – the core PCE deflator – will likely come in hot, as twice the pace needed to reach the Fed’s 2% inflation target. Some of the drivers of the hot print – like financial services or jewelry – likely will be temporary, given the ongoing market correction. The February PCE wont come out until March 28th, but the FOMC can already calculate it from the CPI and PPI prints – and will incorporate the hot number in their forecasts at the March 18-19 meeting. Together with the rapid ramp-up in tariffs that should move the median FOMC participants 2025 inflation outlook meaningfully higher. In the new dot plot, we see an equal chance that the median dot could still anticipate 50 basis points of cuts this year – as in the December version – or that it may now imply just 25 bps of cuts.

Trade policies and economic implications have also been the main forefront of topic discussions recently. The administrations trade stance, particularly the 25% tariffs on steel and aluminum imports from nations including Canada and Mexico, has elicited significant market reactions. These measures, intended to bolster domestic industries, have instead sparked concerns about escalating trade conflicts and potential inflationary pressures. The coming weeks will be crucial in determining how these policies unfold, particularly if diplomatic negotiations fail to ease tensions. On the legislative front, government shutdown fears loom as Congress debated funding measures. While there is bipartisan support for a temporary funding bill, internal divisions within both parties created uncertainty over the outcome.

As we look ahead, investors will be watching inflation data, Federal Reserve commentary, and global trade developments for signs of future market direction. The coming weeks will be pivotal in determining the long-term impact of these trade policies and whether economic momentum can be sustained. While markets have shown resilience, the interplay of fiscal policy, interest rates, and global economic conditions will shape the outlook of the months ahead.

Have a great weekend everyone!