The trajectory of the U.S. stock market last week encapsulated a rollercoaster of emotions, driven primarily by concerns surrounding tariffsThe initial surge gave way to a significant decline, reflecting broader anxieties about heavyweights in the technology sector, which have recently underperformed and contributed to market sluggishness.  

As we look ahead, President Biden is expected to unveil more information regarding tariffs in the coming weekSuch developments could have substantial repercussions for the Federal Reserve's policy expectations, potentially leading to increases in U.STreasury yields and the value of the dollarObservers anticipate that renewed volatility could be on the horizon. 

The Federal Reserve Faces Tough Challenges

Among the notable data releases from last week, the U.S. added just 143,000 jobs in January, slightly below market expectationsMeanwhile, the unemployment rate dipped marginally by 0.1 percentage points to 4.0%. Analysts suggest the labor market may have been affected by the California wildfires and unusually cold weather across many parts of the country. 

Reports indicate that Wall Street largely views the U.S. labor market as robust

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The economy appears to be generating sufficient job opportunities to maintain a stable unemployment rateAlthough hiring has slowed since last year, the majority of Americans seeking employment can find work, and layoffs remain minimalBusinesses seem to be waiting for the new administration's economic policies to take shape before finalizing additional hiring plansIndustry surveys reflect a general favor for tax cuts and regulatory rollbacks, yet there is a cautious approach towards tariffs. 

Concerns surrounding tariffs have now seeped into consumer sentimentThe University of Michigan's consumer confidence index for February declined sharply from January's 71.1 to 67.8, marking two consecutive months of significant downturnsRespondents indicated that one-year inflation expectations spiked from 3.3% in January to 4.3%, reaching the highest level since November 2023. Similarly, five-year inflation expectations rose slightly from the previous month’s 3.2% to 3.3%, the highest since 2008. 

The uncertainty stemming from tariffs and the complex inflation expectations have led to mixed fluctuations in mid-to-long-term U.STreasury yieldsThe two-year Treasury note, closely associated with interest rate expectations, saw an increase of 4.2 basis points to reach a two-week high of 4.277%. In contrast, the benchmark 10-year Treasury yield dropped by 8.2 basis points to 4.483%. Futures tied to the federal funds rate indicate that the first rate cut by the Fed may not materialize until June. 

In a report provided to journalists, TD Securities remarked, “Inflation has stalled in recent months, and the uncertainty surrounding how far the new government will go regarding tariffs may lead the Fed to adopt a more cautious stance on interest rate cuts, keeping policy rates steady until sometime this summer.” 

Bob Schwartz, a senior economist at Oxford Economics, previously indicated that the Fed has signaled a pause in interest rate hikes as it seeks to assess the impact of rate changes on the labor market and inflation

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However, some Fed officials have begun to incorporate tariffs into their forecasts, though it remains unclear whether the President's executive orders will alter their assumptions regarding the timeline, magnitude, or risk balance of these tariffs. 

Market Volatility Could Resurface

In the wake of the President's tariff remarks, the three major stock indexes experienced a sharp decline towards the end of the trading session, erasing all gains made throughout the weekBoth the Nasdaq and S&P 500 registered their second consecutive weeks of losses. 

Goldman Sachs pointed out that one way the stock market may face pressure is through high tariffs posing downward risks to earnings and return expectations for the S&P 500. "If corporate management decides to absorb higher input costs, margins will be squeezedIf companies pass on higher costs to end customers, sales volume may take a hit." The firm estimates that for every 5 percentage point rise in tariffs, per-share earnings for the S&P 500 will decrease by approximately 1%-2%. 

Statistics compiled from Dow Jones revealed a diverse performance across sectors last weekConsumer discretionary and communication services led the declines, particularly with Tesla experiencing an 11% drop as the U.S

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Federal Highway Administration announced a pause on all state electric vehicle infrastructure deployment plans for the fiscal yearAlphabet, Google's parent company, dipped 9.2% despite better-than-expected fourth-quarter earnings, due to disappointing revenue resultsIn contrast, consumer staples, real estate, and energy sectors witnessed gains of 1%. Technology, financials, and utilities as well saw modest increases. 

In terms of fund flows, U.S. stock funds faced outflows for the fourth week within five weeks, as investors grew increasingly wary of the geopolitical risks posed by trade tariffs and heightened concerns regarding key tech companies' earnings reportsAccording to data sent to journalists by the London Stock Exchange Group (LSEG), there was a net liquidation of $10.71 billion in U.S. equity funds over the last week, marking the largest outflow since December of the previous year. 

Disappointing cloud revenue growth from Alphabet and AMD's lackluster data center sales forecast further exacerbated investors' concerns regarding extensive investments in artificial intelligence, resulting in a $6.44 billion sell-off in large-cap equity fundsUnder a risk-averse sentiment, $39.61 billion flowed into safer money market funds. 

Charles Schwab noted in their market outlook that trade disruptions caused by tariffs, along with the ensuing inflationary pressures, have negatively impacted market psychology, with the fear index (VIX) at one point breaching the 20 markThe rise in one-year inflation expectations as per the Michigan consumer sentiment survey has also been attributed, in part, to tariffs. 

Looking forward, this agency anticipates that other potential market movers will include upcoming monthly inflation data

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