Market moves and headlines - not enough to change macro outlook

Last week, risky assets continued to experience a somewhat volatile period. The tone was generally a risk off one, with correlations between risk free and risky assets back to negative.

Government bonds rallied, with US Treasuries leading the charge, resulting in a c.25 basis point (bp) rally in the 10-Year part of the curve in the space of a couple of weeks. Bunds and gilts followed the same trend but to a lesser extent with 10-Year paper rallying by approximately 10 bps in the same period. Looking at credit, spreads have widened but this has been the result of government bonds rallying more than comparable corporate bonds. High yield, financials and investment grade indices have all shown positive performance on a total return basis.

Equities have not been as lucky, particularly in the US. The S&P 500 is down close to 3% in the last 10 trading sessions, erasing the lion’s share of 2025’s gains, while European indices have done better both in this latest sell-off and on a year-to-date basis. As the pain was felt most acutely in the tech sector, the NASDAQ has been the clearest underperformer of the bigger indices with a 6% decline, leaving the 2025 total return in the red.

There are a few reasons behind the price moves. First, in the last couple of weeks data in the US has been weaker than expected. The Purchasing Managers' Index (PMI) Services survey delivered a nasty surprise in the preliminary February reading at 49.7, significantly lower than the 53.4 expected by the Bloomberg consensus. We also received the University of Michigan and the Conference Board consumer confidence surveys that came in below expectations. The housing market also underperformed with existing home sales printing below forecasts. Good for Treasuries, bad for equities. There seems to be growing evidence that the uncertainty created by tariffs (or potential tariffs) is taking a toll in confidence.

Second, and although we are by no means making equity market projections, it did seem that some equity markets were somewhat expensive and heavily reliant on blockbuster earning releases and guidance for future results to sustain momentum. As these have not come to pass, equities have responded accordingly.

Third, and moving to Europe, data has been more in line with expectations. In addition, for all the negative headlines related to the US and Europe’s relationship going forward and the disastrous meeting last Friday, it does seem that there is some hope for some sort of peace agreement to eventually be reached in Ukraine. Markets have also received headlines that the new German government is trying to engineer off balance sheet government-funded funds for defence and infrastructure before taking office. These are rumours at this stage but sizes could be very large indeed. Even if these particular headlines turn out to be exaggerated, it seems the tide has turned for Europe’s willingness to spend on defence. The combination of the aforementioned translates into a possibility of higher growth than previously expected through government spending. Not a bad thing for growth and therefore for spreads and equity, but not so good for government bonds.

The developments thus far this year, although significant and unexpected in certain cases, have not changed our macro outlook too dramatically. The US is decelerating in line with Bloomberg consensus for growth to be closer to 2% in 2025, down from close to 3% last year. Equities do not fancy growth slowdowns, particularly when valuations are stretched. Sadly, it is not possible to have growth moving down by close to 100bps without companies moderating their earnings forecasts. Europe and the UK had a poor finish to 2024 when it comes to growth, but prospects for some sort of ceasefire and more defence spending are positive for risky assets and the economy. Growth projections have not been downgraded in Europe and the UK so far, while a couple of banks have downgraded their projections for Q1 in the US. In line with this, the Atlanta Fed GDPNow estimate moved sharply downwards to its lowest level since 2022. It will be interesting to see the detail of Q1 GDP when it’s released as there could be large temporary moves in inventories and imports given that tariffs uncertainty might cause companies to increase their stocks.

As for spread products, given that the macro outlook has not changed too much in spite of all the headlines - fundamentals remain solid for companies and banks, and technicals have rarely been this strong - we find it unsurprising that spreads have not moved much. We continue to believe that this will be a year of carry more than capital gains, that economies will grow closer to their potential rate of growth, and that central banks will cut rates slowly but surely as there is less need to be restrictive. Keep calm and collect your carry.