Category: Economy

Russell 2000 Enters Bear Market as Tariffs and Economic Fears Weigh on Small Caps

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Russell 2000 has officially entered a bear market, dropping over 20% from its record high.
– New tariffs and economic uncertainty have triggered a sell-off in small-cap stocks.
– The Federal Reserve’s interest rate decisions and economic conditions will be crucial for potential recovery.

The Russell 2000, a key benchmark for small-cap stocks, officially entered bear market territory on Thursday, marking a significant downturn in U.S. equities. The index has plummeted over 20% from its record high in late November 2024, making it the first major U.S. stock measure to reach this threshold. The sell-off was fueled by ongoing economic uncertainty, aggressive new tariffs introduced by the Trump administration, and rising concerns over an economic slowdown.

Following President Donald Trump’s latest tariff announcement, financial markets were hit with fresh waves of volatility. The sweeping trade measures, which raised tariffs on key trading partners, have rattled investors, particularly in small-cap stocks that rely more heavily on domestic revenues and supply chains. The Russell 2000 fell nearly 6% on Thursday alone, accelerating its decline into bear market territory.

Historically, small-cap stocks have been seen as beneficiaries of pro-business policies, including deregulation and tax cuts. However, the new tariffs have increased uncertainty, particularly for companies that depend on imported goods and materials. This has led to a sharp drop in stock values, with retail and manufacturing firms taking the brunt of the sell-off.

Another factor contributing to the downturn is the growing concern over a slowing economy. Analysts warn that higher tariffs could dampen consumer spending and business investment, leading to weaker earnings growth across multiple sectors. Small-cap companies, which typically have higher debt levels and less financial flexibility than large-cap counterparts, are particularly vulnerable in times of economic stress.

The Federal Reserve’s interest rate policy is also playing a role. Traders are anticipating potential rate cuts later in the year, with speculation that the Fed could step in if economic conditions worsen. Lower interest rates could provide some relief to small businesses, making borrowing costs more manageable, but the overall market sentiment remains bearish in the near term.

While small caps have suffered sharp losses, some analysts believe a turnaround could be on the horizon. Historically, small-cap stocks tend to outperform when economic conditions stabilize and interest rates decline. If the Federal Reserve implements rate cuts and trade tensions ease, investors may find new opportunities in the Russell 2000.

For now, however, volatility remains high, and concerns over tariffs, economic growth, and corporate earnings continue to weigh on investor sentiment. The broader market, including the S&P 500 and Nasdaq Composite, has also faced steep declines, though neither index has yet reached bear market territory.

As traders look ahead, the next few months will be critical in determining whether small-cap stocks can recover or if further losses are on the horizon. The direction of trade policy, Federal Reserve decisions, and economic data will play key roles in shaping market performance through the rest of 2025.

Job Openings Drop to Four-Year Low as Labor Market Cools

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Job openings fell to 7.57 million, the lowest level since September 2024, signaling a cooling labor market.
– Hiring remained flat while the quits rate declined, indicating weaker worker confidence.
– Consumer concerns about unemployment are rising, with surveys showing the highest job loss expectations since 2009.

The US labor market showed further signs of cooling in February as job openings fell to their lowest level since September 2024. According to the latest Bureau of Labor Statistics (BLS) report, job openings dropped to 7.57 million, down from 7.76 million in January. This marks one of the lowest levels since early 2021 and continues the trend of a gradually slowing labor market.

Labor Market Adjusting to New Economic Reality

The decline in job openings signals a shift in employer demand, potentially in response to higher interest rates and economic uncertainty. Despite this, the labor market remains stable enough that the Federal Reserve is unlikely to adjust its stance on interest rates in the near term.

Oxford Economics lead US economist Nancy Vanden Houten noted, “The February JOLTS report showed some cooling of labor market conditions but is unlikely to sway the Federal Reserve from its view that the job market is stable enough to withstand an extended period of unchanged interest rates as the central bank monitors progress on inflation.”

The Federal Reserve is closely monitoring these labor market trends as it weighs potential rate cuts. According to the CME FedWatch Tool, investors currently see a 66% chance of a rate cut by the Fed’s June meeting.

Hiring and Quit Rates Near Decade Lows

The JOLTS report also highlighted that hiring remained relatively flat, with 5.4 million new hires in February, up slightly from January’s 5.39 million. The hiring rate held steady at 3.4%.

Meanwhile, the quits rate—a measure of worker confidence in the job market—fell to 2% from 2.1% in the prior month. Both the hiring and quits rates are hovering near decade lows, which raises concerns about future labor market weakness.

Kristina Hooper, chief global market strategist at Invesco, warned that a further slowdown in hiring and an increase in layoffs could pose risks to the economy. “If we think we’re going to see layoffs increase, which I very much anticipate going forward, and we continue to have pretty tepid job growth, that’s a problem,” Hooper said. She added that this situation could increase the risk of stagflation or a broader economic slowdown.

Consumer Sentiment Worsens Amid Labor Market Uncertainty

Public sentiment about the labor market is also turning negative. A recent survey from the University of Michigan showed that two-thirds of respondents expect the unemployment rate to rise within the next year—the highest reading since 2009.

In another sign of weakening labor demand, the Institute for Supply Management’s manufacturing employment index fell to 44.7% in February, its lowest level since September 2024.

Despite these concerns, official labor data has yet to reflect significant job losses. Economists expect the March employment report, set for release on Friday, to show a net gain of 140,000 jobs, slightly lower than February’s 151,000. The unemployment rate is projected to remain steady at 4.1%.

With job openings declining and consumer sentiment weakening, all eyes are on the upcoming labor reports to see whether the slowdown deepens or if the job market can maintain stability in the coming months.

Inflation Remains Stubborn as Consumer Sentiment Hits Lowest Level Since 2022

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Core inflation rose 2.8% in February, exceeding expectations, while consumer spending increased 0.4%.
– Consumer sentiment dropped to its lowest level since 2022, with growing fears about the labor market.
– The Federal Reserve remains cautious on rate cuts as inflation remains above its 2% target.

The U.S. economy continues to face challenges as inflation remains higher than expected while consumer sentiment has dropped to its lowest level in more than two years. Recent data from the Commerce Department and the University of Michigan highlight ongoing concerns about rising prices, slowing consumer spending, and a weakening labor market.

The Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, rose 0.4% in February, bringing the annual rate to 2.8%. Both figures exceeded economists’ expectations, marking the biggest monthly gain since early 2024. The broader PCE index, which includes food and energy, rose 0.3% on the month and 2.5% year-over-year, in line with forecasts. Goods prices increased 0.2%, led by recreational goods and vehicles, while services prices climbed 0.4%. Gasoline prices provided some relief, declining 0.8%.

Consumer spending increased 0.4% in February, slightly below the 0.5% forecast, despite a stronger-than-expected rise in personal income of 0.8%. While Americans are earning more, they remain cautious about their spending, with the personal savings rate rising to 4.6%, the highest level since June 2024. The stock market reacted negatively to the inflation data, with futures briefly declining as investors weighed the possibility of prolonged higher interest rates.

At the same time, consumer sentiment has weakened. The University of Michigan’s sentiment index fell to 57 in March, the lowest reading since November 2022. A key measure of consumer expectations for the economy dropped to 52.6, signaling growing uncertainty about financial conditions. Labor market concerns are increasing, with two-thirds of consumers expecting unemployment to rise in the coming year, the highest level since 2009. While February’s job report showed 151,000 jobs added and an unemployment rate of 4.1%, underlying data suggests hiring may be slowing. Indicators such as declining job postings and fewer workers voluntarily leaving jobs point to reduced confidence in the labor market.

The Federal Reserve now faces a difficult decision. After cutting rates by a full percentage point in 2024, the central bank has held off on further moves this year. Policymakers are closely monitoring inflation, particularly as President Trump’s proposed tariffs could increase costs across multiple sectors. While tariffs are generally viewed as one-time price shocks rather than ongoing inflationary forces, the scope of Trump’s trade policies and the potential for a broader trade war add uncertainty to the outlook.

For now, the Fed is likely to maintain its cautious stance, balancing inflation concerns with signs of weakening consumer confidence and labor market risks. If economic conditions deteriorate further, discussions around potential rate cuts may gain traction. However, as inflation remains above the central bank’s 2% target, policymakers are hesitant to move too quickly.

With inflation pressures persisting and consumer sentiment weakening, the economic outlook remains uncertain. Higher prices and job market concerns could weigh on consumer spending in the coming months, potentially slowing economic growth. Investors and businesses will be closely watching for signals from the Fed as it navigates a delicate balancing act between inflation control and economic

Americans’ Economic Expectations Plunge to 12-Year Low Amid Uncertainty

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The consumer expectations index fell to 65.2, its lowest level in 12 years, signaling rising concerns about financial stability and economic conditions.
– Inflation expectations jumped to 6.2% in March, with fewer consumers optimistic about the stock market.
– Despite declining sentiment, economists and the Federal Reserve remain cautious about whether pessimism will translate into lower spending.

Americans’ confidence in the economy has fallen to its lowest level in over a decade, reflecting heightened concerns over inflation, financial uncertainty, and the impact of President Donald Trump’s economic policies. The latest consumer confidence index from the Conference Board dropped to 92.9 in March, down from 100.1 in February, marking the lowest reading in more than four years.

More concerning is the expectations index—a measure of consumers’ outlook on income, business conditions, and employment—which plunged to 65.2, its weakest level since 2013. This marks the second consecutive month the index has remained below 80, a level historically associated with an impending recession.

The biggest driver of the decline appears to be worsening personal financial expectations. Consumers are increasingly pessimistic about their future earnings and job security, with financial situation expectations hitting their lowest level in over two years.

Inflation remains a primary concern, with consumer expectations for price increases rising to 6.2% in March from 5.8% in February. This shift suggests that Americans anticipate higher costs for everyday goods and services in the months ahead.

At the same time, consumer optimism about the stock market has deteriorated. For the first time since 2023, more Americans expect stocks to decline rather than rise, with only 37.4% of respondents predicting market gains over the next year. This shift in sentiment could indicate broader concerns about economic volatility and the impact of recent policies on financial markets.

While these fears weigh on economic confidence, the labor market remains a bright spot. Among the five components of consumer confidence measured in the survey, only current job market conditions showed improvement in March. This suggests that while Americans are worried about inflation and market stability, they are not yet seeing widespread job losses.

While consumer sentiment is declining, the critical question remains: Will this pessimism lead to reduced spending and a slowdown in economic growth? So far, Federal Reserve officials and economists are unsure.

Fed Chair Jerome Powell acknowledged the disconnect between consumer surveys and actual economic behavior, noting that while people express concern about the economy, they often continue spending on major purchases like cars and homes. “The relationship between survey data and actual economic activity hasn’t been very tight,” Powell said in a recent press conference.

Economists at Morgan Stanley have also downplayed fears of an imminent recession, arguing that consumer spending remains resilient. While retail sales dipped in January, they rebounded in February, casting doubt on the notion that a major downturn is underway.

If consumer confidence continues to decline, it could eventually translate into lower spending, which would have significant implications for businesses and economic growth. However, for now, the broader economic data suggests that while uncertainty is high, the economy remains relatively stable. The coming months will be crucial in determining whether Americans’ pessimism is justified or if the economy can weather the storm.

Federal Reserve Holds Rates Steady, Adjusts Growth and Inflation Outlook Amid Policy Uncertainty

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Fed maintained its benchmark interest rate at 4.25%-4.5% for the second consecutive meeting.
– Core PCE inflation is now expected to be 2.8% at year-end, up from 2.5%.
– GDP growth projections for 2025 were lowered from 2.1% to 1.7%.

The Federal Reserve opted to hold interest rates steady at its March meeting, maintaining the federal funds rate within a range of 4.25% to 4.5%. This decision marks the second consecutive meeting in which borrowing costs remain unchanged, following a series of three rate cuts in late 2024. However, alongside the decision, policymakers signaled a revised economic outlook, reflecting slower growth and more persistent inflation.

Fed officials now forecast that the U.S. economy will grow at an annualized pace of 1.7% in 2025, a downward revision from the previous estimate of 2.1%. At the same time, inflation projections have been raised, with the core Personal Consumption Expenditures (PCE) index now expected to reach 2.8% by year-end, up from 2.5% previously. These adjustments reflect increasing uncertainty surrounding the economic impact of new trade policies and tariffs imposed by the Trump administration.

“Uncertainty around the economic outlook has increased,” the Fed noted in its official statement, referring to the administration’s aggressive tariff measures targeting China, Canada, and Mexico. Additional duties on steel, aluminum, and other imports are expected to be announced next month, potentially disrupting supply chains and fueling inflationary pressures.

While the Fed’s statement maintained language indicating that “economic activity has continued to expand at a solid pace,” policymakers acknowledged growing concerns about the possibility of stagflation—a scenario where growth stagnates, inflation remains high, and unemployment rises. The unemployment rate projection was slightly raised to 4.4% from 4.3%, reflecting potential labor market softening.

In an additional policy shift, the central bank announced a slower pace of balance sheet reduction. Beginning in April, the Fed will reduce the amount of Treasuries rolling off its balance sheet from $25 billion to $5 billion per month, while keeping mortgage-backed security reductions steady at $35 billion per month. The decision was not unanimous, with Fed Governor Chris Waller dissenting due to concerns about slowing the pace of quantitative tightening.

Despite these shifts, the Fed’s “dot plot”—a key indicator of policymakers’ rate projections—still points to two rate cuts in 2025. However, there is growing division among officials, with nine members supporting two cuts, four favoring just one, and another four seeing no cuts at all.

The Fed’s decision and economic projections have triggered mixed reactions in the financial markets. Stocks initially fluctuated as investors assessed the impact of slower economic growth and the persistence of inflation. The S&P 500 and Nasdaq saw volatile trading, while the Dow remained under pressure amid concerns that the Fed may not cut rates as aggressively as previously expected. Bond markets also responded, with yields on the 10-year Treasury note rising slightly as inflation concerns remained elevated.

Investors are increasingly wary of a scenario where economic growth weakens while inflation remains sticky, a condition that could lead to stagflation. Sectors such as financials and consumer discretionary stocks saw selling pressure, while defensive assets, including gold and utilities, gained traction as traders sought safe-haven investments.

Looking ahead, the Fed’s challenge will be navigating the dual risks of inflationary pressures and economic slowdown. The upcoming release of February’s core PCE inflation data next week will provide further insights, with economists anticipating a slight uptick to 2.7% from January’s 2.6%—a figure still far from the Fed’s 2% target.

As the economic landscape continues to evolve, markets will be closely watching the Fed’s next moves and whether the central bank can balance its mandate for maximum employment with maintaining price stability.

What the Fed’s Next Move Means for Interest Rates and the Economy

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve is widely expected to hold interest rates steady at its policy meeting next Wednesday.
– The Fed remains cautious as it monitors the potential impact of President Trump’s trade policies and rising inflation risks.
– While a downturn is not imminent, some economists have raised their probability estimates for a 2025 recession.

As financial markets brace for the Federal Reserve’s latest policy decision, analysts overwhelmingly expect the central bank to maintain its benchmark federal funds rate at a range of 4.25% to 4.5%. According to the CME Group’s FedWatch tool, which tracks market expectations, there is a 97% probability that the Fed will hold rates steady, marking the second consecutive meeting without a change.

Federal Reserve officials, including Chair Jerome Powell, have signaled a cautious approach, waiting to see how President Trump’s proposed tariffs and other economic policies unfold. The central bank is balancing multiple factors, including a softening in inflation, shifts in consumer confidence, and geopolitical uncertainty. While the Fed lowered rates late last year after inflation cooled, the recent uptick in price pressures has prompted policymakers to take a more measured stance.

A major concern for the Fed is the potential for tariffs to disrupt economic stability. Trade tensions have already caused a drop in consumer confidence, with the University of Michigan’s Consumer Sentiment Index falling to 57.9 in March, well below expectations. This decline reflects growing worries about inflation and the broader economic outlook. If tariffs push prices higher and dampen growth, the Fed may face pressure to respond with rate cuts to stabilize the job market and economic activity.

On the other hand, some economists warn that persistent inflation could keep interest rates elevated for longer. Rising prices on imported goods due to tariffs could lead to higher inflation expectations, limiting the Fed’s ability to ease policy. This delicate balancing act has led to increased uncertainty about the central bank’s future moves.

Investors will also be closely watching the Fed’s Summary of Economic Projections, which outlines policymakers’ expectations for interest rates, inflation, and economic growth. Deutsche Bank analysts predict that Fed officials may reduce their expected rate cuts for 2025, penciling in only one reduction instead of the two previously forecasted.

Recession fears remain a topic of debate. While the labor market has shown resilience, some economic indicators suggest potential risks ahead. Goldman Sachs recently raised its recession probability estimate for 2025 from 15% to 20%, reflecting concerns over trade policy, consumer sentiment, and broader market conditions. If economic conditions deteriorate further, the Fed could be forced to pivot toward rate cuts to stimulate growth.

Despite these uncertainties, financial markets are currently pricing in the likelihood of a rate cut beginning in June. However, if inflation proves to be more stubborn than expected, the Fed may have to delay any policy adjustments. Powell’s post-meeting press conference will be closely analyzed for any signals about the central bank’s future direction.

With inflation, tariffs, and economic sentiment in flux, the Federal Reserve’s approach remains one of caution. Investors, businesses, and policymakers will all be watching closely for any signs of shifts in monetary policy, knowing that the decisions made now will have lasting effects on financial markets and the broader economy.

Dow Rallies but Still on Track for Worst Week in Two Years

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
-The Dow bounced 500 points but remains on track for its steepest weekly loss since March 2023.
– Consumer confidence dropped sharply amid ongoing tariff-related concerns and inflationary pressures.
– The market awaits next week’s Fed meeting, where rates are expected to remain unchanged.

The stock market experienced a sharp rebound on Friday, with the Dow Jones Industrial Average surging more than 500 points. The S&P 500 and Nasdaq also posted gains of 1.7% and 2.2%, respectively. Despite the rally, the major indices remain on pace for significant weekly losses, marking the worst performance for the Dow in two years and further cementing concerns over continued volatility on Wall Street.

Technology stocks were among the biggest gainers in Friday’s session, with Nvidia jumping over 4%, while Tesla, Meta, Netflix, Amazon, and Apple all posted modest gains. The positive momentum was partially driven by news that a government shutdown is likely to be avoided, as Senate minority leader Chuck Schumer signaled support for a Republican-led funding bill.

However, economic data released on Friday cast a shadow over investor sentiment. The University of Michigan’s Consumer Sentiment Index fell to 57.9 in March, well below expectations of 63.2. The decline highlights growing anxieties over inflation, trade tensions, and the broader economic outlook. A rising 10-year Treasury yield and concerns over inflation expectations have added to market uncertainty, making it difficult to gauge the sustainability of Friday’s rebound.

While large-cap stocks have seen a sharp selloff, small-cap stocks have been hit even harder. The Russell 2000, which tracks small-cap companies, has fallen nearly 18% from its recent high, pushing it closer to bear market territory. Small-cap stocks are often more sensitive to economic uncertainty and interest rate fluctuations, making them particularly vulnerable in the current environment. Rising borrowing costs and concerns over consumer demand have weighed on these companies, many of which rely heavily on domestic growth and credit availability.

However, amid market turmoil, value stocks could present an opportunity for investors seeking stability. Historically, value stocks—companies with strong fundamentals and lower valuations—tend to outperform during periods of market distress. With uncertainty surrounding inflation, interest rates, and trade policies, investors may rotate into sectors such as utilities, consumer staples, and healthcare, which typically offer defensive characteristics. Additionally, as fears of a potential recession grow, businesses with stable earnings and strong cash flow could see increased investor interest.

The week’s market selloff accelerated after the S&P 500 fell 1.4% on Thursday, officially entering correction territory with a decline of over 10% from its record high last month. The Nasdaq Composite has suffered even steeper losses, down more than 9% year-to-date. Meanwhile, the small-cap Russell 2000 index has dropped nearly 18% from its recent peak, nearing bear market territory with a 20% decline. This marks four consecutive weeks of losses for the S&P 500 and Nasdaq, as well as the second straight losing week for the Dow.

Much of the recent volatility has been attributed to President Trump’s fluctuating trade policies, which have increased uncertainty regarding tariffs and their economic implications. The unpredictable nature of the administration’s approach has led to heightened market swings, with investors struggling to navigate the changing landscape.

Looking ahead, all eyes are on next week’s Federal Reserve policy meeting. Market participants overwhelmingly expect the Fed to hold interest rates steady, with futures pricing in a 97% likelihood of no change. However, investors remain wary of any signals regarding future policy moves, particularly as inflation concerns continue to mount.

With uncertainty dominating the financial landscape, investors are bracing for more turbulence in the weeks ahead. While Friday’s rally provided a temporary reprieve, the broader trend remains cautious as economic and policy concerns continue to weigh on sentiment.

Inflation Cools, but Persists: Rising Costs of Food, Healthcare, and Transportation

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Consumer Price Index (CPI) rose 2.8% year-over-year in February, with food, medical care, and auto costs still climbing.
– A dozen large Grade A eggs now average $5.90, up 59% from a year ago.
– Inflation remains above the Fed’s 2% target, likely delaying any interest rate cuts.

American consumers continue to feel the sting of stubborn inflation as essential goods and services remain costly despite an overall slowdown in price growth. The latest Consumer Price Index (CPI) report showed a 2.8% year-over-year increase in February, a slight cooling from previous months but still well above the Federal Reserve’s 2% target.

One of the most notable price hikes continues to be in food costs, particularly for eggs. A dozen large Grade A eggs averaged $5.90 in February, a staggering 59% increase from a year ago. Other breakfast staples like coffee and bacon have also risen, adding to household grocery bills. While some categories, such as fruits and vegetables, saw modest declines, overall grocery prices remain elevated. Eating out is also becoming more expensive, with restaurant prices climbing 3.7% over the past year.

Medical expenses are another growing burden for consumers, with hospital costs up 3.6% year-over-year and nursing home care rising by 4.1%. Home healthcare costs surged 5.6%, reflecting the increasing demand for in-home medical services. Meanwhile, health insurance premiums climbed 3.9%, further squeezing household budgets already stretched thin by higher living costs.

The rising costs extend beyond healthcare and food, impacting transportation as well. Used car prices, which had been easing in previous months, surged again by 2.2% in January and another 0.9% in February. Auto insurance, a major expense for many households, has increased nearly 11% over the past year. Insurers continue to raise premiums as they struggle with underwriting losses, which have persisted for three consecutive years. However, there was some relief at the gas pump, with gasoline prices dipping slightly to a national average of $3.08 per gallon as of mid-March, down from $3.39 a year ago.

With inflation still running above target, the Federal Reserve faces a difficult decision in the coming months. The central bank has signaled that it will likely keep interest rates steady at its next policy meeting, as economic uncertainty surrounding tariffs and supply chain disruptions remains a concern. The Fed’s cautious stance reflects the balancing act it must perform—ensuring inflation continues to cool while avoiding any moves that could trigger a broader economic slowdown.

For consumers, the persistence of high prices across essential categories underscores the challenges of managing household budgets in this inflationary environment. While some areas, such as gasoline and certain food items, have seen modest relief, overall costs remain elevated. Policymakers will continue monitoring inflation trends closely, but for now, Americans should brace for continued financial strain as they navigate these price increases.

Falling Treasury Yields, Inverted Yield Curves, and Market Weakness: Is a Recession Coming?

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The 10-year yield is falling, signaling potential economic concerns.
– Value stocks are holding up, but major indices are down, with only the Dow managing gains.
– The inverted yield curve historically precedes recessions, though recent history has offered mixed signals.
– While small caps have been under pressure, they could present attractive investment opportunities.

As treasury yields decline and the stock market falters, investors are left wondering: Is the U.S. heading into a recession? The market rally that defined much of last year has faded as interest rate cuts have come to a halt, leading to renewed concerns about economic contraction. Historically, the bond market has been a reliable predictor of recessions, and with the longest lasting inverted yield curve ending in late August 2024, suggests that investors should take notice.

The Yield Curve’s Recession Warning

One of the most closely watched economic indicators is the yield curve—the relationship between short-term and long-term interest rates on U.S. government bonds. Typically, longer-term bonds carry higher yields than short-term ones. However, when the yield curve inverts, meaning short-term bonds yield more than long-term ones, it has historically signaled an impending recession.

The record for the longest inverted yield curve was broken in August 2024 with 793 days. The previous record stood at 624 days set in 1979. This is significant because, throughout history, an inverted yield curve has been a highly accurate predictor of recessions. In nearly every case, when the yield curve inverts, a recession follows within 12-18 months. The exception was four years ago when the yield curve inverted three times, yet no recession materialized. The key question now is whether this time will follow historical norms or diverge as it did in the recent past.

Stock Market Implications

The stock market is showing signs of strain. While value stocks are holding up relatively well, major indices have struggled. The S&P 500 and Nasdaq have been in the red, with only the Dow managing to stay in positive territory. This weakness across equities suggests investors are reassessing risk and economic growth prospects.

A falling 10-year yield often signals that investors are seeking safety in government bonds, rather than taking on risk in equities. This shift in sentiment could reflect a broader concern about future economic growth and corporate earnings.

Why Small Caps Could Be a Smart Play

Small-cap stocks, often seen as more economically sensitive, have been particularly vulnerable in the current environment. Unlike large-cap stocks, which can better weather economic downturns due to stronger balance sheets and diversified revenue streams, small-cap companies tend to struggle when borrowing costs are high and consumer demand weakens. However, this very weakness can present opportunity.

Historically, small-cap stocks have tended to perform well coming out of economic slowdowns or recessions. When the Federal Reserve eventually pivots toward cutting interest rates again, small caps could benefit significantly from lower borrowing costs and increased economic activity. Additionally, small-cap stocks tend to be more attractively valued in uncertain times, making them a potential area of opportunity for investors willing to take a longer-term perspective.

Consumer Debt and Economic Strain

Another factor adding to recession fears is the state of U.S. consumer debt. Credit card balances have reached record highs, and with interest rates at their highest levels in decades, the burden on consumers is intensifying. High consumer debt combined with rising delinquencies could lead to reduced consumer spending, which is a major driver of the U.S. economy.

Are We Headed for a Recession?

While no indicator can predict the future with absolute certainty, the current economic signals are concerning. The longest inverted yield curve in the rearview mirror, declining treasury yields, stock market weakness, and record-high consumer debt all point to potential economic troubles ahead. If history is any guide, the U.S. could be facing a slowdown or even a recession in the coming months. However, for investors, this may also present opportunities—particularly in areas like small-cap stocks, which historically rebound strongly as economic conditions improve.

Investors should remain cautious but also look for potential value plays in the small-cap space, as these stocks may offer upside once the market begins to stabilize. As always, diversification and a long-term approach remain key to navigating uncertain times.

US Job Growth Slows in February as Unemployment Rises to 4.1%

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
-The US economy added 151,000 jobs in February, below the expected 160,000 but higher than January’s revised 125,000.
– The jobless rate ticked up to 4.1% as labor force participation declined.
– Average hourly earnings rose 0.3% month-over-month, signaling a possible slowdown in inflation pressures.

The US labor market continued to show signs of softening in February, with employers adding 151,000 jobs, missing economists’ expectations of 160,000. The unemployment rate rose to 4.1%, up from 4% in January, as the number of job seekers increased while labor force participation declined to 62.4%. This marks a continued trend of moderation in hiring as businesses respond to economic uncertainty and shifting government policies.

Despite the miss on job creation, analysts note that the pace of hiring remains sufficient to maintain employment stability. RSM chief economist Joe Brusuelas described the report as a “Goldilocks” scenario, where job growth is neither too strong nor too weak. He pointed out that maintaining 100,000 to 150,000 new jobs per month is enough to keep the labor market steady.

One of the most notable shifts in February was the decline in federal government employment, which saw a net loss of 10,000 jobs. This aligns with the Trump administration’s push to reduce the size of the federal workforce, a policy that could lead to more widespread job losses in the coming months. Additionally, the number of Americans working multiple jobs rose to a record high of 8.9 million, highlighting concerns over job quality and economic stability.

Wage growth also showed signs of cooling, with average hourly earnings increasing by 0.3% from the previous month, down from January’s 0.4%. On an annual basis, wages rose 4%, slightly lower than the prior month’s 4.1% gain. This moderation could ease inflationary pressures, a key consideration for the Federal Reserve as it weighs future interest rate cuts.

The labor market’s softening is occurring against a backdrop of broader economic uncertainty, fueled by shifting trade policies and corporate cost-cutting measures. The Trump administration’s new tariff policies are aimed at bolstering domestic manufacturing, but some industries, such as aluminum production, warn that the measures could lead to job losses. Additionally, major companies, including Goldman Sachs and Disney, have announced significant layoffs, raising concerns that the unemployment rate may continue to climb.

While some sectors, such as healthcare and transportation, continued to add jobs, others showed signs of strain. The household survey, which includes broader employment data, recorded a drop of nearly 600,000 employed individuals, the largest decline in over a year. Moreover, part-time employment for economic reasons increased, pushing the underemployment rate to its highest level since 2021.

Looking ahead, economists will be watching upcoming inflation data and Federal Reserve policy decisions to gauge the trajectory of the labor market. Although investors are still pricing in three rate cuts this year, uncertainty over inflation and labor market conditions could impact the Fed’s timeline. The February jobs report underscores a delicate balancing act for policymakers—supporting economic growth while ensuring inflation remains under control.

US Manufacturing Holds Steady in February Amid Tariff Concerns

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– US manufacturing PMI dipped to 50.3 in February, signaling continued but slowing growth.
– Concerns over new tariffs on imports from Canada, Mexico, and China are creating uncertainty for manufacturers.
– Prices for raw materials surged to their highest levels since June 2022, potentially impacting production costs.

The US manufacturing sector remained stable in February, though concerns over looming tariffs threatened to disrupt recent gains. While the Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) registered at 50.3—just above the threshold for expansion—key indicators such as new orders and employment showed signs of weakness.

The report indicated that while the manufacturing industry is maintaining momentum, companies are growing increasingly uneasy about potential tariffs on goods imported from Canada, Mexico, and China. The uncertainty surrounding these trade policies has led to a slowdown in new orders, as customers hesitate to commit to long-term contracts.

Tariffs Fuel Uncertainty and Price Increases
Manufacturers reported that trade tensions and prospective retaliatory measures from key US partners were affecting business sentiment. Firms in the chemical and transportation equipment industries, in particular, noted disruptions caused by a lack of clear guidance on tariff implementation. The uncertainty has also impacted investment decisions, with businesses pausing expansion plans.

At the same time, prices for manufacturing inputs surged to their highest levels since June 2022. The ISM’s price index jumped to 62.4 from 54.9 in January, reflecting the growing cost of raw materials. Many manufacturers are concerned that rising costs will eventually be passed on to consumers, potentially reversing recent efforts to stabilize inflation.

Employment and Supply Chain Challenges
Employment in the sector contracted after briefly expanding in January. The manufacturing employment index fell to 47.6, suggesting that firms are pulling back on hiring in response to economic uncertainty. With weaker demand and higher costs, companies are taking a cautious approach to workforce expansion.

Supply chains, which had been recovering from disruptions in previous years, also showed signs of strain. The ISM supplier deliveries index increased to 54.5, indicating longer wait times for materials. This is typically a sign of strong demand, but in this case, it reflects supply chain bottlenecks and manufacturers front-loading inventory in anticipation of potential tariff impacts.

Looking Ahead
With the Trump administration expected to finalize tariff decisions in the coming days, manufacturers remain on edge. Industries reliant on imported steel, aluminum, and electronic components could face the greatest challenges, particularly as suppliers adjust pricing in response to trade policy changes.

The ISM report follows a series of economic data releases that suggest the US economy may have lost momentum in early 2025. Weak consumer spending, a widening goods trade deficit, and a decline in homebuilding all point to a more cautious economic outlook. Some economists now believe that GDP could contract in the first quarter.

As the manufacturing sector braces for potential headwinds, all eyes remain on the White House’s next moves regarding tariffs. The coming weeks will be critical in determining whether February’s stability can be sustained or if rising costs and trade uncertainty will trigger a broader slowdown.

Fed’s Preferred Inflation Measure Shows Progress as Consumer Spending Dips

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Core PCE inflation eased to 2.6% annually in January, aligning with economist expectations
– Personal income surged 0.9%, more than double the forecasted 0.4% increase
– Consumer spending unexpectedly declined 0.2% despite higher incomes, as savings rate jumped to 4.6%

Inflation continued its gradual retreat in January according to the Federal Reserve’s preferred gauge, though concerns about President Trump’s tariff plans are casting a shadow over future price stability, the Commerce Department reported Friday.

The personal consumption expenditures (PCE) price index rose 0.3% for the month and 2.5% annually, while the core measure—which excludes volatile food and energy prices—maintained the same monthly increase but showed a 2.6% year-over-year rate. The annual core figure represents a meaningful step down from December’s upwardly revised 2.9%.

These figures aligned precisely with economist expectations and suggest the Fed’s aggressive interest rate campaign continues to yield results, albeit at a slower pace than policymakers might prefer. The central bank targets 2% inflation as its long-term goal.

“The inflation report was good, but we’re not done,” said Jose Rasco, chief investment officer for the Americas at HSBC Global Private Banking and Wealth Management. “So that prudent patient Powell, as I call him, is going to remain in play, and I think he’s going to wait.”

Perhaps more surprising were the income and spending components of the report. Personal income surged 0.9% in January—more than double the 0.4% forecast—but this windfall didn’t translate to higher consumer spending. Instead, Americans reduced their expenditures by 0.2%, contradicting expectations for a slight 0.1% increase. The personal savings rate jumped to 4.6%, suggesting consumers may be growing more cautious about economic conditions.

Within the report’s details, goods prices increased 0.5%, driven by a 0.9% rise in motor vehicles and parts, along with a 2% jump in gasoline prices. Services inflation showed more restraint at 0.2%, while housing costs rose 0.3%.

The data arrives as Federal Reserve officials continue deliberating their next steps for monetary policy. In recent weeks, policymakers have expressed cautious optimism about the inflation trajectory but remain adamant about seeing more evidence that price pressures are sustainably returning to their 2% target before implementing further interest rate reductions.

Following the report’s release, financial markets modestly increased the probability of a June interest rate cut, with futures traders now seeing just over 70% likelihood of a quarter-point reduction, according to CME Group’s FedWatch tool. Markets currently anticipate two rate cuts by year-end, though odds for a third reduction have been rising in recent days.

While consumers are more familiar with the Consumer Price Index (CPI)—which showed 3% headline inflation and 3.3% core inflation in January—the Federal Reserve prefers the PCE measure because it captures a broader range of consumer spending, accounts for substitution effects when prices change, and places significantly less emphasis on housing costs.

The subdued spending figures present a curious economic paradox: despite strong income growth, consumers appear increasingly cautious. This restraint could help cool inflation further but might also signal weakening consumer confidence—the primary engine of American economic growth.

Financial markets responded positively to the report, with stock futures pointing higher and Treasury yields mostly declining, suggesting investors view the data as supporting the case for eventual monetary easing while not indicating immediate economic trouble.

Treasury Rally Pushes Yields Below 4% as Inflation Shows Signs of Cooling

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Short-term Treasury yields fell under 4% as inflation cooled and GDP forecasts weakened, boosting rate-cut expectations.
– Traders anticipate a July rate cut and over 60 basis points of relief by year-end, driving a strong February rally.
– Softer data and policy shifts have investors prioritizing economic slowdown risks over inflation fears.

A powerful rally in U.S. Treasuries has slashed short-term bond yields below 4% for the first time since October, sparked by cooling inflation and shaky economic growth signals. Investors are piling into bets that the Federal Reserve will soon lower interest rates, possibly as early as midyear, giving the bond market a jolt of momentum.

The rally gained steam on Friday as yields on two- and three-year Treasury notes dropped by up to six basis points. This followed a disappointing January personal spending report and a steep revision in the Atlanta Fed’s first-quarter GDP estimate, which nosedived to -1.5% from a prior 2.3%. Even the less volatile 10-year Treasury yield dipped to 4.22%, its lowest since December, signaling broad market confidence in a softer economic outlook.

This month, Treasuries are poised for their biggest gain since July, with a key bond index climbing 1.7% through Thursday. That’s the strongest yearly start since 2020, up 2.2% so far. Analysts attribute the surge to a wave of lackluster economic data over the past week, flipping the script on expectations that the Fed might hold rates steady indefinitely.

Market players are now anticipating a quarter-point rate cut by July, with over 60 basis points of easing baked in by December. The latest personal consumption expenditures data for January, showing inflation easing as expected, has fueled this shift. Investors see it as a green light for the Fed to pivot toward supporting growth rather than just wrestling price pressures.

Still, some warn it’s early days. The GDP snapshot won’t be finalized until late April, leaving room for surprises. For now, two-year yields sit below 4%, and 10-year yields hover under 4.24%. Experts say the rally’s staying power hinges on upcoming heavy-hitters like next week’s jobs report—if it flags a slowdown, the case for rate cuts strengthens.

A week ago, 10-year yields topped 4.5%, with fears of tariff-fueled inflation looming large. But recent tariff threats and talk of federal job cuts have shifted focus to growth risks instead. Investors are shedding bearish positions, and some are even betting yields could sink below 4% if hiring falters and unemployment climbs.

The Fed, meanwhile, is stuck in a tricky spot with inflation still above its 2% goal. If push comes to shove, many believe it’ll lean toward bolstering growth—a move the market’s already pricing in. As February closes, index fund buying could nudge yields lower still, amplifying the rally.

This swift turnaround underscores the bond market’s sensitivity to shifting winds. With jobs data on deck, all eyes are on whether this Treasury boom has legs.