Interest Rate & Market Commentary for Week Ending 11th April 2025
Overview of US and Australian Markets
I’m in a spin. Well, at least you could say that the VIX was consistently high. Talk about roller coasters. As noted on our Friday post, forget about end-of-day closes, you need to be watching intra-day moves. Thursday in USA was a case in point – At its intra-day low, the S&P 500 was down 6.3% (down the most since March 2020) and very close to tripping the 15 minute circuit breaker. It then pared losses before a renewed sell-off in the last hour. The VIX climbed to circa 55 before retreating (volatility begets volatility). Crude back down to below US $60 per barrel. The USD sold off 1.3%, continuing with its atypical moves recently. Gold hit a record high. Right now, half a trading day is the equivalent of a month of trading in normal times, such are the moves.
As we all know, on Wednesday the Trump administration issued a 90-day tariff pause on countries that had not retaliated. Notably, that excluded China, which now has a mere 145% tariff applied. That is prohibitive, and evidence of that occurred Thursday US time when news started to cross the wires that Apple had made an emergency airlift of circa 1.5 million iPhones out of its Indian manufacturing facilities to the US consumer.
As for Wednesday, when tariffs were paused for 90 days on non-retaliating countries, stocks soared in the US trading time zone. Short end of the yield curve soared. Share market records were broken. There was indiscriminate buying, even for Apple and China related ETFs. At the close, the S&P 500 finished up 9.6%%, the Nasdaq 100 12.3%%, and the Dow Jones Industrial Average 8.1%. The Phila Semi Index +19%.
Some of the intraday moves on the biggest technology stocks in the market set records in terms of value added. Nvidia’s 17% jump added some $390 billion to its market capitalization, blowing past its previous record, when it added $329 billion in one session in July. Apple’s 13% intraday jump today is the fourth-biggest add ever, at more than $260 billion, with Microsoft’s $220 billion gain not far behind, sixth on the list.
But the reprieve was short lived. The Wednesday rally was predominantly short covering (a lot of heavily shorted stocks rallied significantly) exacerbated by tight liquidity, algorithmic trading, and retail buyers (who have actually been buying leveraged ETFs – go figure!) all feeding into the unprecedented jump. Reputedly there was very little buying from long-only institutional buyers.
More significantly, anyone that thought the cratering of the bond markets over the few days prior did not at least precipitate this announcement would be naïve. There is a golden rule in the financial market – no one gets to stuff around with the bond markets. And we are not just talking about the range of more arcane trades that were going heavily awry as from Monday and were no doubt risking investment strategy blow ups. You can’t make unfunded tax cuts if your treasury market is in flux because Trump just gave up on tariffs funding any tax cuts. To make an argument for unfunded tax cuts, well you need a compliant treasury market.
And the USD. We were at the beginning of a repatriation of capital out of the US. Interestingly, the USD has not only not rallied since Wednesday’s announcement but rather continued to go backwards. Such is the damage that has been done to the US reputation.
On Wednesday, various investment houses wound back recession calls. Reflective of calls, Torsten Slok, Apollo’s chief economist stated “I do think that recession risk has been removed now. It looks like now we have a more steady pace of negotiations coming.”
While heightened uncertainty persists, to put it lightly, the Wednesday announcement did at least provide a few things. What it did was cut off the left tail risk – the direst of recession scenarios. It suggests we are past peak tariff uncertainty and from here uncertainty can only dissipate. It shows that the Trump administration is cognisant of the ructions in the share market and, more importantly, the bond market. And if that is the case, then you would think the market will move higher – not off to the races, but three steps forward, two steps back.
By Friday, it appeared that comments from a Fed official eased market concern. 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. The US 10-year government bond yields came well off Friday’s highs, but saw their biggest weekly surge in over two decades. Good luck, because we have a sneaking suspicion China is not about to back down – and that would be very significant.
On the US corporate bond side there was a significant widening in credit spreads over the course of the week. U.S. high-yield corporate bond spreads surged to 401 bps as of late Thursday, their highest since November 2023. Widening in the US investment grade market was more orderly but still material rising to106 bps, the highest since August 2024, from 96 bps. For context, many believe spreads around 400bps in the high-yield market indicate recession anticipation.
By the end of the week, you could be forgiven thinking the market was down but, notwithstanding the predominance of down days, the S&P 500 was up circa 5% due largely to the Wednesday rally. In contrast, the long-end of the bond market got crushed. The yield on 10-year Treasuries — which are a benchmark for the cost of everything from corporate bonds to mortgages — rose as much as 16 basis points to nearly 4.6% Friday, a more than half-percentage point increase since the end of last week, before paring the jump. The 30-year rate climbed as much as 12 basis points to nearly 5%. As for the short-end, the 2-year rose too, up 8 bps to 3.96%. The worst week since 2019. And consumer confidence is crumbling.
The selloff in Treasuries intensified as investors continued to pull back from US assets, sending longer-dated yields toward the biggest weekly surge since the 1980s. The rout, which was set off by the US trade war that’s shaken global markets, is threatening to deal another hit to the economy by pushing up borrowing costs more broadly. It is also casting doubt on Treasuries’ status as the world’s safe haven as they slid along with the stock market this week, sending investors into other assets like the Swiss franc, gold and the Japanese yen.
The five-day climb has surpassed those seen during the chaos of the 2008 financial crisis and be the most since the early 1980s, when the high level of interest rates meant the impact was far less jarring. President Donald Trump’s erratic tariff moves have led to wild swings in US government debt over the past week by not only undermining confidence in the economy, but also the direction of US policy and America’s standing in the world. That’s eroding appetite for US assets and has spurred speculation that crucial overseas owners — like China — may retaliate by pulling back from Treasuries. Talk has also swirled about blowups in hedge fund trades and an exodus of foreign investors.
The drop in Treasury prices was accompanied by a sharp slide in the dollar — which tumbled this week by the most since 2022 — in an indication that overseas investors are pulling back from the US. The Dollar Spot Index was down nearly 1% on Friday, bringing the weekly decline to over 2% and helping to support foreign currencies across emerging and developed markets. Investors also flocked to Europe in debt markets to escape the broader turmoil, leaving German yields largely unchanged in the week while the rate US 10-year debt surged more than 50 basis points. That’s the biggest underperformance of Treasuries compared to bunds since at least 1989, according to available data.
Believe the hype on selling the US. Despite President Trump’s pause on broad tariffs, investors are still looking to shun US assets in favour of Europe and other developed markets, according to the latest MLIV Pulse survey. Of the 203 respondents to a poll conducted April 9-11, after Trump announced a 90-day reprieve on levies for most countries, 81% plan to either keep their exposure to US assets the same or decrease it. More than a quarter of respondents said they’re curbing their investment more than they had anticipated before the president unveiled global tariffs of as much as 50% earlier this month. As per our Thursday daily headline, from US exceptionalism to sell everything US. What’s the reflex trade – the Deutsche Bund, Swiss Franc, Japanese Yen, and gold.
On the macro data front, the University of Michigan Consumer Sentiment survey on Friday brought a fresh signal that consumers were queasy even before Wednesday’s policy shift, with a plunge in sentiment as inflation expectations soared to multi-decades highs.
Australia’s 10-year government bond yield
Just like the US, Australian bonds got slammed all week long. You’d think the RBA was about to raise interest rates. But there was nothing rational about the moves in Australia this week, the market was simply mirroring the carnage and borderline dysfunction on the US market.
By the end of the week, Australia’s 10-year government bond yield had risen a mere 40 bps to 4.48%. The 2-year fared much better, rising circa 20 bps over the course of the week, ending at 3.4%. This week in Australian bond markets is a classic case of financial market contagion. The issues impacting the US bond market aren’t relevant to Australia, but that hasn’t meant that the cost of financing businesses has not moved in tandem with the US markets.
On more fundamental factors, in a speech in Melbourne, Bullock stated that it is “too early” to determine how U.S. President Trump’s trade war will impact interest rates in the coming months, while downplaying expectations of a double rate cut in May. She added that the market turmoil caused by the trade conflict is not as severe as the 2008 global financial crisis.
Still, markets remain fully priced for a 25bps rate cut in May, with some even leaning toward a half-point move. This dovish tilt in market pricing was mainly due to the intensifying US-China trade war, which poses risks to Australia’s export-driven economy, particularly given China’s role as its largest trading partner. On the economic front, Australia’s consumer inflation expectations rose to 4.2% in April from 3.6% in March, reflecting concerns that the escalating trade tensions could boost inflation rate.
Despite Trump’s backdown, bond markets still bet the RBA will cut the cash rate five times this year, taking the cash rate to 2.85% by December from 4.1%. Traders ascribe a one-in-three chance of a 0.5 percentage point cut in May. NAB said it now expected the RBA would deliver a 0.5 percentage point rate cut in May and slash the cash rate to 2.6% by February 2026. In contrast, Deutsche Bank on Thursday reversed its call for a 0.5 percentage point rate cut in May, and now expects a 0.25 percentage point cut instead.
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 visibility, 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 was the week that the bond markets roared. For those not already aware, there is one golden rule in the financial markets: no one gets to stuff with the bond markets. It is the hand that feeds the governments. It’s that simple. Just ask Liz Truss, the comparison / parallel is very much intended. And when you are moving towards what appears to be unfunded tax cuts, well you best have a compliant government bond market.
Over the course of Monday and Tuesday, the US government bond markets were straining. The long-end the curve was backing up significantly when, just like the USD, it should have been doing the opposite. Arcane trades (and not the basis trade which is a short end curve trade) were risking investment strategy blow ups. Theories abounded about the steep back up in the back end of the curve: lurking concerns about tariffs stirring inflation or necessitating government stimulus; liquidations in favour of cash-like instruments; rumours that foreign owners, including China, were selling, rebalancing of portfolios away from US assets. Most concerningly, it could have been an early sign that investors are looking to liquidate positions even in high-quality assets to raise cash.
Right now, no one knows exactly. It will become evident over time but, while the stock market vigilantes may have been out and about, the bond market vigilantes did not even need to go on a feared ‘buyers strike’ on the week’s 10-year and 30-year auctions (relatively well received). The mere risk is enough to turn even the much trenchant of governments on its heel.
Charts of the Week
Figure 1 – US Bond Yield Spread. The classic 10-year minus the 2-year US government bond yield spread. This chart for this week may be one of the few things that make sense in the bond markets all this week. In short, the curve steepened dramatically over the week. Meaning, taking the technical out of the equation, the market is pricing in a recession.
Figure 2 – S&P500 versus High Yield Volatility Inverted – is intended to highlight a common misconception in the markets – bond markets are the soothsayer to equities markets crashes. Its true enough when that crisis is a credit one, as per the GFC and Covid, but we are not in that market currently. The other point about this chart is just to note, that like the equities market, bond volatility is heavy. Good thing the all-in yield is attractive. And right now, when you’d be lucky to get a gain out of equities to year end, that seems rather attractive.
Figure 1: US 10-year minus 2-year Bond Yield Spread Figure 2: S&P 500 vs HY Vol. Inverted
Figure 3 – On the topic of market valuations, as at April 11 2025 the S&P 500 Forward PE Ratio was 19.0x. The chart below illustrates the S&P 500 forward PE ratio, the 25-year average, and the -1 and +1 standard deviation of. The previous Friday the forward PE ratio was 21.1x. The S&P 500 Forward PE Ratio 25 Year statistics are: 1 Std. Dev 20.04, -1 Std. Dev 13.45, Average 16.75. The market is looking cheap, right? Not so fast. Analysts are notoriously slow in reducing earnings estimates. And if we are heading into a tariff induced recession, expect much of the next 12-months at a company level to be characterized by a raft of earnings downgrades. The market is still priced at 15% earnings growth for 2025. So, valuations are a massive risk. But maybe the upcoming earnings season will provide a catalyst. Maybe, or maybe not. Both Delta Airlines and CarMax have removed guidance during their earnings calls during the week. And as far as the market is concerned, that is as bad as an earnings downgrade – CarMax down 17% on Thursday.
Figure 4 – World Trade Policy Uncertainty Index, off the charts. Look at Figure 4 below and tell me we are not in extraordinary times. Introduced by Federal Reserve economists Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo in their paper The Economic Effects of Trade Policy Uncertainty, the Trade Policy Uncertainty Index (TPU) is constructed by counting the frequency of joint occurrences of “trade policy” and “uncertainty” terms across major newspapers. A reading of 100 indicates that articles discussing “trade policy” and “uncertainty” account for 1% of the total news articles.
The trend in the chart shows that the TPU Index spikes initially in the 1970s following the Nixon “shock” to U.S. trade policy in 1971 and the imposition of oil import tariffs by President Ford in 1975. There are additional increases in TPU resulting from trade tensions with Japan in the 1980s and around the NAFTA negotiations in the mid-1990s. TPU reaches unprecedented levels beginning after the 2016 and 2024 U.S. Presidential Elections and spikes several times in response to heightened tensions between the U.S. and its trading partners, notably China, Mexico, and Canada. And right now, off the charts!!! We are on a very dangerous path – the US has committed to a trade war with China. And where are their allies – not Canada and probably not the EU.
Figure 3: S&P 500 Forward PE Ratio Figure 4: World Trade Policy Uncertainty
Market Summary Table
| Name | Week Close | Week Change | Week High | Week Low |
|---|---|---|---|---|
| Cash Rate% | 4.1 | |||
| 3m BBSW % | 4.1191 | -0.009 | 4.119 | 4.021 |
| Aust 3y Bond %* | 3.307 | -0.118 | 3.374 | 3.242 |
| Aust 10y Bond %* | 4.355 | 0.174 | 4.360 | 4.092 |
| Aust 30y Bond %* | 5.086 | 0.246 | 5.086 | 4.775 |
| US 2y Bond % | 3.8555 | 0.1855 | 3.949 | 3.738 |
| US 10y Bond % | 4.4189 | 0.4279 | 4.419 | 4.157 |
| US 30y Bond % | 4.8508 | 0.4608 | 4.851 | 4.594 |
| iTraxx | 67 | -5 | 71 | 67 |
| $1AUD/US¢ | 62.85 | 2.44 | 62.85 | 59.54 |
Looking Ahead: Scheduled Major Economic Releases for the Week of 7 April, 2025
- US retail sales on Wednesday US time is likely to be the biggest release. It could still be a tad confused – people bring forward purchases pre tariff. Or it might start to reflect the sentiment surveys.
- In Australia, the labour force survey will be watched, but like most hard data in this month, the tariff impacts have yet to hit.
Major Economic Releases for the Week of 7 April, 2025
| Date | Country | Release | Consensus | Prior |
|---|---|---|---|---|
| Monday, 14/4 | US | NY Fed 1 yr Inflation Expectations | n/a | 3.3% |
| Tuesday, 15/4 | Australia | RBA Board Minutes | n/a | n/a |
| Tuesday, 15/4 | US | Import Price Index March | n/a | 0.4% |
| Wednesday, 16/4 | Australia | WBC MI Leading Index March | n/a | 0.8% |
| Wednesday, 16/4 | US | Retail Sales March | n/a | 0.2% |
| Thursday, 17/4 | Australia | Labour Force Survey | n/a | multiple |
| Thursday, 17/4 | US | Philadelphia Fed Index April | n/a | 12.5 |
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