U.S. Indices closed lower in what turned to be a volatile Wednesday trading session. The Dollar was weak closing at year-to-date lows. Trade tensions with China remain high, US President Trump launched an investigation into national security risks posed by US reliance on imported processed critical minerals. Trump is also planning to use negotiations with over 70 countries to ask them to disallow China to ship goods through their countries. Additionally, the US put export restrictions on certain Nvidia and AMD chips to China following the recent halt China imposed on Boeing deliveries. The latter update weighed on chip names, with NVDA, AMD and INTC tumbling. This saw tech post the largest losses in the sector space, while the NASDAQ underperformed. The majority of sectors were red, with the large-cap sectors weighing but with outperformance in energy as crude prices were buoyed. Upside in crude started on Bloomberg reports that China is open to talks with the US, but only if US President Trump shows respect. Crude prices continued to gain after the US issued fresh Iran-related sanctions, including on a Chinese refiner said to be buying Iranian crude, while Treasury Secretary Bessent said they are prepared to take all actions available to get Iran’s energy exports down to zero. The downside in stocks accelerated after Fed Chair Powell spoke, where he continued to tow the line that patience is needed until they get more clarity on the impact of tariffs. This is at odds with Governor Waller, who recently announced support for lowering rates sooner, and to a greater extent, in response to Trump’s current large tariff policies. He also dismissed talks of a Fed put, noting markets are functioning and orderly. The risk-off trade gave a helping hand to havens (including Treasuries) with T-notes, the Japanese Yen, Gold and the Swiss Franc catching a bid into APAC trade before a last-minute bid in equities saw havens off best levels. Elsewhere, US data largely took the back seat, but Retail Sales rose 1.4% in March, above the Refinitiv consensus of 1.3%, with ex-autos also beating expectations with upward revisions. The control metric missed expectations, but this was offset by an upward revision to the prior. Meanwhile, IP was a touch softer than forecasted. NAHB Housing Market index beat, while business inventories were in line with expectations. The latest data saw an update to the Atlanta Fed GDPNow, which now tracks growth at -2.2% (prev. -2.4% on April 9th), with the gold-adjusted model at -0.1% (prev. -0.3%). Fed Chair Powell continued to tow the line the Fed is well-positioned to wait for greater clarity before considering a change to its policy stance. The key takeaway is that Powell is sticking to a wait-and-see approach, despite Governor Waller’s preference to ease faster, and to a greater extent, in response to Trump’s current tariff policy. Chair Powell warned the Fed may find itself in a challenging scenario in which dual-mandate goals are in tension; if that occurs, the Fed would consider how far the economy is from each goal and potential time horizons for those gaps to close. He noted that effects remain high in uncertainty, with administration policies still evolving. Powell added that so far, larger-than-expected tariffs likely mean higher inflation and slower growth, but the inflationary effects of tariffs could be more persistent, noting how it depends ultimately on inflation expectations. Powell said the Fed’s obligation is to keep longer-term inflation expectations well-anchored. He remarked that the US is at or near maximum employment, while inflation is a bit above the 2% goal, with the labour market solid, broadly in balance and not contributing to inflation. On growth, he said the economy is solid despite uncertainty, but warned of downside risks, stating growth likely slowed in Q1 from last year’s solid pace. Powell stated that the sharp decline in business, household sentiment, and elevated uncertainty reflect trade policy concerns. In the Q&A, Powell noted that tariffs are even later than in the Fed’s upside estimates, warning car company supply chains are likely to be disrupted for years, and that could lead to inflation persistence. The Bank of Canada left rates on hold at 2.75%, versus split expectations for a hold and for a 25bps cut, although both options were discussed. The BoC also left its estimate of the neutral rate unchanged between 2.25-3.25%, implying that current rates sit at the centre of the neutral range. The BoC also noted how they will support economic growth while ensuring that inflation remains well controlled. It stated it will proceed carefully, with particular attention to risks and uncertainties facing the domestic economy. The Bank of Canada acknowledged that major shifts in US trade policy have increased uncertainty, cut prospects for growth, and raised inflation expectations. However, it noted that longer-term inflation expectations are little changed, although short-term inflation expectations have moved up. It also noted that from April, inflation will be pulled down for one year by the removal of consumer carbon tax, while lower oil prices will also dampen inflation. Within the monetary policy report, the GC released two scenarios for their forecasts. In the first scenario, where most tariffs imposed are negotiated away, uncertainty is high but tariffs are limited in scope. Canadian growth weakens temporarily and inflation remains around the 2% target. In scenario two, where a long-lasting trade war unfolds, a protracted trade war causes Canada’s economy to fall into recession this year and inflation rises temporarily above 3% next year. It also notes how many other trade policy scenarios are possible. There is also an unusual degree of uncertainty about the economic outcomes within any scenario, since the magnitude and speed of the shift in US trade policy are unprecedented. Within the MPR, the BoC updated its estimate of the output gap in Q1 to be between -1% and 0% (prev. -1.25% and -0.25%) indicating an economy in modest excess supply. Governor Macklem noted how the BoC are prepared to act decisively if incoming information points clearly in one direction, and their focus will be on assessing the downward pressure on inflation from a weaker economy, and the upward pressure from higher costs. In response to the rate decision, CAD saw strength as rate cut bets for this meeting were unwound, meanwhile looking ahead money markets are still pricing c. 50bps of easing by year-end, with the June decision currently priced as a coin flip. U.S. Retail Sales for March marginally topped expectations, with the headline printing 1.4% (exp. 1.3%, prev. 0.2%). Ex-Autos rose 0.5% (exp. 0.3%, rev. 0.7%), while ex-gas/autos remained at 0.8%, as the prior was revised up to 0.8% from 0.5%. Retail control came in at 0.4%, underneath the forecasted 0.6% and the previous 1.3%, which was revised higher from the initial 1.0%. On the headline, Pantheon Macroeconomics highlight that over two-thirds of the jump was due to a 5.3% rebound in auto sales, likely due to consumers bringing forward purchases in anticipation of the new tariffs on finished vehicles, which came into effect in early April. In addition, sales of building materials jumped 3.3%, electronics & appliances stores rose 0.8%, and clothing climbed 0.4%, while gasoline stations fell 2.5% and furniture sales dipped 0.7%. Pantheon Macroeconomics notes that, “Mapping this report’s numbers onto the PCE provisionally suggests real consumers’ spending increased by 0.36% last month.” The consultancy adds, combined with the upward revisions to January and February’s retail sales, that is consistent with quarterly annualized consumption of just over 1% in Q1, stronger than the 0.5% expansion they previously expected, but still the smallest increase since Q2 2023. Pantheon illustrate the slowdown from the pace of H2 last year is partly due to a weather-related hit to goods spending early in the quarter, and a broad-based slowdown in spending on services. Ahead, consumption over the next quarter or two looks set to be just as weak as Q1, if not weaker. The NAHB housing market index for April rose to 40.0 from 39.0, and above the expected 37.0. Within the release, the current sales conditions rose two points to 45, while sales expectations in the next six months fell to 43 from 47. Traffic of prospective buyers increased one point to 25. In commentary, the survey revealed that 29% of builders cut home prices in April, unchanged from March, however, the average price reduction was 5%, also the same rate as the previous month. Lastly, the use of sales incentives was 61%, rising slightly from 59% in March. Overall, Oxford Economics stated most builders are already seeing a tariff-induced rise in the cost of building materials. Despite the pressure of higher costs on their profit margins, builders continue to offer price cuts and other incentives to encourage sales. Elsewhere, Oil closed higher by 2.36% while Gold surged ending Wednesday with a 3.37% gain for a new all-time high.
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