- Scott Bessent said there was no guarantee that the US could avoid a recession.
- US sales increased by 0.2% compared to forecasts of a 0.6% increase.
- Market participants were looking forward to the upcoming FOMC policy meeting.
Equities gained for a second session as market participants paused to assess recent developments, especially tariffs. The lack of an immediate catalyst paused the recent collapse. However, tariff uncertainty and fears of the US recession remain relevant.
Last week, equities collapsed, with the S&P 500 losing over 10% from its peaks in February. The decline came amid fears that Trump’s tariffs would weaken the global economy and tip the US into a recession. The US president implemented a 25% tariff on steel and aluminum imports, igniting trade wars with the Eurozone and Canada.
Trade wars are threatening the stability of the US economy, which is driven partly by exports and imports. Consequently, market participants are dreading a likely recession. Trump has avoided predicting a recession, meaning he is ready for whatever comes. Meanwhile, on Monday, Treasury Secretary Scott Bessent said there was no guarantee that the US can avoid a recession. Such an outcome would mean further declines for equities.
US retail sales (Source: US Census Bureau)
On Monday, the US released its retail sales report, showing weaker-than-expected consumer spending. Sales increased by 0.2% compared to forecasts of a 0.6% increase. This was yet another indicator of an economic slowdown.
Furthermore, market participants were looking forward to the upcoming FOMC policy meeting. Traders expect the central bank to keep interest rates unchanged. However, the outlook for future moves remains clouded due to Trump’s tariffs. Recent economic data has shown weaker demand and softer inflation. Last week, the US released cooler-than-expected consumer and wholesale inflation figures. This increased expectations for Fed rate cuts.
However, recent developments in US trade policy have pushed up inflation expectations. Notably, a report last week revealed a drop in consumer confidence and a sharp increase in inflation expectations. Therefore, it overshadowed the downbeat inflation numbers. If inflation is going to increase in a few months, then there would be no need for the Fed to rush rate cuts.
Consequently, market participants are waiting for clues during the Fed meeting on Wednesday. A cautious tone would be bearish for equities as it would mean higher rates for longer. On the other hand, a dovish tone would allow equities to recover. Currently, traders are pricing at least 60-bps of rate cuts this year. The tone during the meeting might change this outlook.
