Interest Rate & Market Commentary for Week Ending 18th April 2025
Overview of US and Australian Markets
The first half of the week in equities could be characterised as signs of market calm but devoid of conviction, with the equities markets only posting modest gains and on low trading volumes. During this period, morning gains faded during the course of the trading day. Wednesday was a break with major indices down 2 – 3%.
On Wednesday, it was a Jerome Powell speech at the Economic Club of Chicago that triggered the main moves of the day. The key comment from Jerome Powell, and it was exactly when the market started to sell off, was when the Fed said it may have a problem with it’s dual mandate this year. Specifically, he stated that the economy will likely be “moving away” from both of its goals “probably for the balance of this year.” That is, higher inflation and higher unemployment (a stagflation scenario, and was written all over the conversation) and which would put the Fed between a rock and a hard place. He also stated that there is uncertainty about tariffs would lead to a one-off price impact or that the price impact would be more persistent. And finally, he reiterated that, with the current employment and inflation levels, the Fed is in no rush to move on rates. So, forget any Fed put, at least in the short term.
However, the relief in bonds persisted during the week. Depending on your view of the US economy (recession probability vs stagflation probability, that is Fed moves), US bonds might be looking highly attractive at the moment. And that would be a rare bright spot. And if you like the US bond market, government and higher capital stack corporates, then the Australian bond market must be a screaming buy – we don’t have a stagflation risk environment like the US.
Over the course of the week, the S&P 500 Index was down 3.6%, the Nasdaq 100 down 4.6%, the Dow Jones Industrial Average down 4.6%, and the Russell 2000 Index down 3.5%.The 10-year was relatively flat, up 7 bps to 4.43% by Thursday. The 2-year declined 10 bps to 3.8%. The term premium is interesting and meaningful, but we will get to that.
Trump called on China to reach out to him to kick off negotiations, indicating there is no end in sight to fight that has seen both sides raise trade barriers to staggering levels. The Asian nation ordered airlines not to take further deliveries of Boeing Co. jets. And President Xi has been on a charm offensive in SE Asia this week and is striking a notably defiant tone – China is not about to back down. Meantime, the European Union and US made scant progress bridging trade differences.
Interesting, a BofA Global Research survey of fund managers released on Tuesday highlighted global investors have slashed their holdings of U.S. stocks by a record amount in the past two months, a trend that is likely to continue given a record number of managers say they plan to keep cutting their exposure. Respondents to BofA’s monthly survey of fund managers were a net 36% underweight U.S. equities, the most in nearly two years, a number that has plunged by 53 percentage points since February, the biggest such fall on their records. BofA polled 164 investors with $386 billion of assets under management. There were further signs of nervousness in the survey, particularly about U.S assets. A net 42% of investors said they expected a global recession, the most since June 2023 and the fourth-highest level in the past 20 years.
The chart below certainly suggests there is plenty more selling capacity, which admittedly is to March 2025 end. The AAII Asset Allocation Survey is a monthly survey conducted by the American Association of Individual Investors (AAII). The results is published on the first day of each month, reflecting the asset allocation of individual investors last month.
Figure 1: AAI Asset Allocation Survey
Meanwhile, retail buyers that have only known bull markets, have been buying the dip.
An earnings season to remember … or quickly forget? Given the intense tariff-driven market volatility seen in April thus far, it would be understandable if this week’s unofficial start to first quarter earnings season flies under the radar. Extreme policy uncertainty around the state of global trade may make this season feel less significant as a directional indicator for equity markets and the U.S. economy. In fact, a significant number of companies may decline to provide forward guidance due to a lack of confidence in projecting what tariffs may mean for the future of costs and supply chains.
What is certain is that Q1 earnings growth estimates for the S&P 500 have been downgraded since the beginning of the year. Utilities is the only sector that hasn’t been subject to negative revisions. With the bar lowered, and most of the tariff tirade coming in late March/early April, we expect a high percentage of earnings “beats” this quarter. But investors may not reward them much because the outlook remains opaque. Earnings misses, on the other hand, will likely be penalized more heavily compared to historical averages.
On a positive note for bonds, relative to stocks, the sudden pause in tariffs may have a more sustained stabilizing effect, with elevated yields offering compelling value in a number of fixed income sectors.
Although last week’s volatility across taxable fixed income sectors spooked some investors, we reiterate our view that these moves may enhance valuations and starting yields for those seeking to allocate to more tariff resistant asset classes. Consider the current yield and spread of various fixed income categories versus their average levels over the last 10 years in percentile terms (Figure 2). In general, the higher the percentile for current yield, the more compelling the entry point. As for current spreads, a percentile in the 50 range (neither substantially wider nor tighter relative to their 10-year average) indicates spreads are fairly priced.
The figure below is quite extraordinary. The previous week was probably an unprecedented breakdown in the correlation between the US credit spreads and the USD. In an interview with Bloomberg, Jenet Yellen was definitive – the sell-off in the USD was a clear sign of global investors selling US assets. This view is not inconsistent with a detailed piece produced by the notable US economist Ed Yardeni, who has identified the bond market turmoil to largely due to forced selling by hedge funds. Not all hedge funds are US funds.
Regarding the chart, US Credit Spread = Merrill Lynch CCC-grade High-yield Bond Yield – US 10-year Government Bond Yield (risk-free interest rate). Credit spread reflects the market’s expectations for future corporate default risk.
Credit spread also serves as an indicator of USD liquidity. When USD lending and borrowing conditions tighten, investors demand higher returns on high-yield corporate bonds, causing the credit spread to widen and the dollar to appreciate due to constrained liquidity. Conversely, in a looser lending environment, the credit spread narrows, leading to dollar depreciation.
Figure 3: Breakdown – De-Dollarisation?
Wall Street strategists expect the S&P 500 Index to rally through the remainder of 2025, despite the uncertainty and convulsions caused by President Donald Trump’s trade policies. Most strategists have adjusted their predictions for the S&P 500’s performance this year, with some cutting their targets, but the vast majority still expect equities to rise.
The trade chaos has stock market forecasters across Wall Street adjusting their predictions for where the S&P 500 will end 2025. Subramanian cut hers to 5,600 from 6,666, and colleagues at Oppenheimer & Co., Evercore ISI, Goldman Sachs Group Inc., Societe Generale SA and RBC Capital Markets have trimmed theirs as well. Ed Clissold at Ned Davis Research lowered his target to 5,550 from 6,600, reflecting a 50% chance of recession. But the vast majority still expect equities to rise from here. Only Berezin at 4,450 and JPMorgan Chase & Co.’s Dubravko Lakos-Bujas at 5,200 see the index finishing 2025 below where it closed Friday, 5,364.
That said, there’s little unity among the predictions. From Berezin’s target to Wells Fargo & Co.’s Chris Harvey at 7,007, the gap is more than 2,500 points, or 57%, which is the widest on record for this point in the year. The average of 6,067 represents a roughly 13% leap from Friday’s close. The biggest challenge for strategists trying to model where stocks are headed is Trump’s trade strategy seems to change by the day. Scott Chronert, Citigroup Inc.’s US equity strategist and managing director probably stated it at its simple best: “Holy moly! We weren’t prepared for this. People have been asking since last summer how to position on Trump’s tariff policy, but are you kidding me? I don’t know how to do that modelling.”
Fears of a slowing economy are at the heart of the uncertainty. Just six weeks ago, economists were expecting the US to post 2.3% growth in gross domestic product, but they’ve cut that 1.8% as Trump’s tariffs take hold. Which makes the generally bullish stance of most stock market strategists harder to justify.
Figure 4: S&P 500 EPS Forecasts Figure 5: Citi Earnings Revision Index
Regarding Figure 4, the EPS estimates for the coming year are based on S&P Global’s quarterly announced earnings forecasts, which draw from the quarterly earnings S&P 500 constituent companies reported.
Regarding Figure 5, the Citigroup Earnings Revision Index is calculated as the proportion of listed companies that have received upward EPS revisions minus the proportion of those with downward EPS revisions. When the index reading is above zero, it means that analysts on average are optimistic about the outlook for corporate earnings, which means a higher possibility for the S&P 500 to post strong performance. A decline below zero in the index usually precedes an EPS revision by about 1~2 quarters. The index is thus considered a leading indicator for corporate earnings adjustments.
On the macro front, US retail sales released on Wednesday rose substantially in March on a jump in car purchases and other goods such as electronics, suggesting consumers were scrambling to get ahead of tariffs. The value of retail purchases, not adjusted for inflation, increased 1.4%, the most in over two years. Excluding autos, sales climbed 0.5%. So, US consumers are bringing forward purchases. But that will lead to a subsequent ‘vacuum’.
Finally, the gold-to-silver ratio quantifies the ounces of silver required to purchase one ounce of gold. At approximately 100:1 as of April 2024, this metric has only breached triple digits three times in the past century: in 1991, March 2020, and April 2024. Historically, the ratio averaged 15:1 during ancient monetary systems and 50:1 over the last 50 years, but modern market forces—including central bank policies and industrial demand—have reshaped its relevance. The ratio’s extremes often signal macroeconomic stress or shifts in investor sentiment. In 1980, after the Hunt brothers’ attempt to corner the silver market, the ratio narrowed to 16:1 as silver peaked near $50/oz. By 1991, an 11-year bear market in silver pushed the ratio to 100:1, marking a generational buying opportunity ahead of a 60% price surge over the next two years. Similarly, the COVID-19 pandemic-driven ratio of 126:1 in March 2020 preceded a 140% silver rally within months.
Figure 6: Gold to Silver Ratio is Sending an Ominous Warning Unless You are Long Gold
Australia’s 10-year government bond yield
What a difference a week makes. Over the course of the week Australia’s 10-year government bond yield declined to finish 4.34%, after two consecutive days of declines, as risk sentiment improved after some U.S. trade policy relief. The 2-year increased 4 bps to 3.34%. Quite the term premium. President Donald Trump is now looking into possible exemptions on existing auto tariffs, after temporarily exempting certain tech products from reciprocal tariffs.
On the monetary policy front, minutes from RBA’s April policy meeting highlighted uncertainty around the timing of the next interest rate adjustment. While the board noted that the May meeting would be an appropriate time to reassess policy, it emphasized that no decision had been predetermined. Still, markets remain fully priced for a 25bps rate cut in May, with some assigning around a 30% probability of a half point move. Investors now await the release of the March jobs report on Thursday to assess the health of the labour market and its potential influence on the RBA’s next policy steps.
One by one, economists are abandoning their interest rate forecasts for next month after US President Donald Trump upended financial markets with his “liberation day” tariffs. Earlier this month, a dozen were tipping the RBA would keep rates on hold in May. Today, just four are sticking with that view. Money markets are fully priced for a standard quarter of a point cut at the RBA’s next policy meeting on May 20 and are pricing in a 34% chance of a jumbo half-a-point move.
Figure 1: Australian 10-year Bond Yield – Bang for Risk Buck
US BOND MARKETS
US government debt rallied slightly and across the curve over the week. On Tuesday, a Treasury Department official said a rule change was under consideration that could lower trading costs for banks. The US 10-year was down 4 bps to 4.34%, the US 3-year down 2 bps to 3.86%. While the rule change mentioned by Deputy Treasury Secretary Michael Faulkender has been on the radar for years, his comments on the Supplementary Leverage Ratio, or SLR, helped drive yields lower to levels last seen during last week’s market turmoil.
On Wednesday, it was a Jerome Powell speech at the Economic Club of Chicago that triggered the main moves of the day. The key comment from Jerome Powell, and it was exactly when the market started to sell off, was when the Fed said it may have a problem with it’s dual mandate this year. Specifically, he stated that the economy will likely be “moving away” from both of its goals “probably for the balance of this year.” That is, higher inflation and higher unemployment (a stagflation scenario, and was written all over the conversation) and which would put the Fed between a rock and a hard place. He also stated that there is uncertainty about tariffs would lead to a one-off price impact or that the price impact would be more persistent. And finally, he reiterated that, with the current employment and inflation levels, the Fed is in no rush to move on rates. So, forget any Fed put, at least in the short term.
A reversal of hawkish trade policies seems unlikely, but policy support could provide some market relief. However, with near-term inflation risks skewed to the upside, the Fed will likely need clear evidence of labour market weakness to reduce the risk of second-round inflation effects before resuming rate cuts. In addition, fiscal stimulus leveraging tariff revenues for stimulus checks or new tax cuts (beyond the extension of prior tax cuts) does not appear to be a near-term prospect. Overall, investors should probably brace for further volatility until the economic impacts of tariffs become clearer.
However, investors have been motivated to buy longer-maturity Treasury debt at yield levels that offer the most compensation, relative to shorter-maturities, in more than a decade. The term premium increased to 71 basis points, last seen in September 2014. Term premiums have been on the rise as US economic policy becomes harder to predict. A gauge of policy uncertainty neared a record this month after President Donald Trump announced sweeping tariffs and then backtracked on some. Proposals for tax cuts and a potential need to increase the US government debt limit also contributed to the move.
Many market watchers last week suggested that foreign powers including China were offloading their US Treasury holdings in retaliation for Trump’s tariffs, exacerbating the plunge in prices. But Ed Yardeni, the noted US economist, released a detailed note yesterday indicating the vast majority of selling had come from forced selling by hedge funds.
Meanwhile, higher Treasury yields are failing to support the value of the US dollar as they have historically. The relationship between the dollar and Treasury yields is the weakest in three years as investors question the dollar’s haven status. Options positioning shows show that traders expect more losses for the dollar. The moves last weak were highly unusual and in an interview yesterday, Jenet Yellen stated that she believed the move in the USD last week was a sign of foreign asset selling. But there is a ton of narratives out in the markets about last weeks move.
Meanwhile, in the corporate bond market, lowly rated high yield companies have failed to sell any debt in the US high-yield bond market since Trump unleashed market turmoil and raised fears of a US recession with the wave of tariffs he announced earlier this month. Wall Street banks face potential losses on billions of dollars of short-term loans they had committed to in the expectation that junk-bond investors would ultimately take on the debt. But banks can be wrong-footed if the interest rate they have agreed to provide differs sharply from market levels, as can be the case in times of stress. The market sell-off comes as the private equity industry – and the banks that have long profited from their deals – struggles with a drop-off in dealmaking and fading hopes of a revival amid a looming threat of a recession.
High yield credit spreads have eased slightly, now at 410 bps. Last week they shot to the highest level in nearly two years last week, hitting 4.61bps before retreating slightly after Trump agreed to pause some tariffs. Goldman Sachs last week raised its forecast for defaults by high-yield and leveraged loan borrowers this year to 5% and 8% respectively, up from 3% and 3.5%.
US Equities and Australian Equities
Wall Street’s gyrations shook markets anew, with stocks erasing losses to notch their best week since 2023. Yes, you could be forgiven for thinking we were in a down week. The rally came as a rout in bonds and the dollar abated, following a few chaotic days that underscored fears foreign investors are beating a retreat from American assets.
Volatility shows little signs of easing as concerns that President Donald Trump’s fast-evolving trade policy is not only shaking the global economy, but threatening the US status as the world’s safe haven. On Friday, the S&P 500 jumped 1.8% on a report that a Federal Reserve official said the central bank is ready to help stabilize markets, if needed. We’d say the Friday move was a lot more meaningful than what happened on Wednesday. Much of that gain was short covering, algorithmic trades, and retail punters. Reputedly there was little buying from long-only institutional investors. Friday had the feel of a more meaningful upward move.
The S&P 500’s more than 10% intra intraweek trading range rivals the sharp price swings of the depths of the pandemic. Roller coaster is not a technical term, but it is probably the best adjective to describe price action across equity markets this week. Signs of a capitulation were evident over the last week as momentum and breadth indicators reached levels commensurate with other major turning points in equity markets. But this doesn’t imply stocks will immediately shoot higher or that the period of high volatility is over. Sentiment is the main market driver as there is little visibility. The tariff pause raised hopes for a path to negotiated resolutions and that the administration is paying attention to the markets. Now the market waits to see what some of these trade deals look like.
Earnings season kicked off properly on Friday with several large banks, including JP Morgan, reporting. Banks have pretty good earnings visabilty, notwithstanding the complete cessation in M&A. But a word of caution here. As CarMax found out on Thursday, pulled guidance is as bad as a material earnings guidance downgrade. The stock got slammed 17% on the day. And so far Delta Airlines and Walmart have also pulled guidance and its early days. This earnings season has the potential to throw a lot more volatility into the mix.
Concluding Remarks
This week is reporting season in earnest in the US. The earnings will likely beat guidance, but everyone is looking for capex spend guidance. Is Corporate already in a recession. Many wise minds have said likely ‘yes’. And compare that sentiment to the chart below.
Figure 1: Earnings Revision Index
Figure 1 – How Analysts are Late to the Scene. The Citigroup Earnings Revision Index is calculated as the proportion of listed companies that have received upward EPS revisions minus the proportion of those with downward EPS revisions. When the index reading is above zero, it means that analysts on average are optimistic about the outlook for corporate earnings, which means a higher possibility for the S&P 500 to post strong performance. A decline below zero in the index usually precedes an EPS revision by about 1~2 quarters. The index is thus considered a leading indicator for corporate earnings adjustments.
Charts of the Week and Market Summary
Market Summary Table
Name Week Close Week Change Week High Week Low
Cash Rate% 4.1
3m BBSW % 4.003 -0.116 4.048 4.015
Aust 3y Bond %* 3.350 0.043 3.376 3.348
Aust 10y Bond %* 4.236 -0.119 4.370 4.236
Aust 30y Bond %* 4.936 -0.150 5.082 4.936
US 2y Bond % 3.856 -0.038 3.832 3.786
US 10y Bond % 4.419 -0.098 4.364 4.279
US 30y Bond % 4.851 -0.076 4.798 4.747
iTraxx 67 -5 71 67
$1AUD/US¢ 63.51 0.66 63.69 63.25
Looking Ahead: Scheduled Major Economic Releases for the Week of 22 April, 2025
- An exceptionally quiet week on the macro, which means investors will focus on reporting. On they won’f be focused on results, rather guidance.
- UofMich – well, its Chicago based, – expect it to be rather grim.
Major Economic Releases for the Week of 17 April, 2025
| Date | Country | Release | Consensus | Prior |
|---|---|---|---|---|
| Friday, 25/4 | US | UoM Consumer Sentiment | n/a | n/a |
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