Stock Markets Rally Amid Fed Optimism and Easing Geopolitical Risks

The S&P 500 Index ($SPX) (SPY) closed up +0.55% on Friday, while the Dow Jones Industrials Index ($DOWI) (DIA) gained +0.52%. The Nasdaq 100 Index ($IUXX) (QQQ) rose by +0.74%. March E-mini S&P futures (ESH25) are currently up +0.51%, and March E-mini Nasdaq futures (NQH25) have increased by +0.63%.

Stock indexes recovered from early losses as positive remarks from Fed Chair Powell ignited a wave of short covering. Powell stated, “The US economy continues to be in a good place,” which facilitated rebounds for the S&P 500, Dow Jones, and Nasdaq from recent lows. Additionally, reports indicating that Russian President Putin is willing to discuss a temporary truce in Ukraine alleviated some geopolitical tensions, further boosting market sentiment. Chip stocks also played a significant role in this recovery, highlighted by Broadcom’s notable +8% rally following its better-than-expected Q1 earnings.

Federal Reserve Updates Affect Market Dynamics

Broad market support came from the Fed-friendly US February payroll report, which revealed that nonfarm payrolls and average hourly earnings rose less than predicted, while the unemployment rate unexpectedly climbed. These mixed results contributed to initial stock declines stemming from economic uncertainty related to the Trump administration’s trade policies.

Hawkish comments from the Fed also led to increased bond yields, which were detrimental to stocks. Chairman Powell reiterated that despite considerable uncertainties, the US economy remains solid and that policy adjustments do not need to be expedited. Fed Governor Kugler suggested that holding interest rates steady might be necessary for “some time” due to rising inflation risks. Fed Governor Bowman noted that the neutral rate, which neither encourages nor restricts economic activity, has likely increased since the Covid-19 pandemic.

In February, US nonfarm payrolls grew by +151,000, missing expectations of +160,000. January’s nonfarm payrolls were revised down to +125,000 from +143,000. Compounding concerns, the February unemployment rate rose by +0.1 to 4.1%, against forecasts that predicted no change.

Average hourly earnings inched higher to an annual rate of 4.0%, slightly lower than expectations of 4.1%. However, January’s consumer credit reading increased by +$18.084 billion, exceeding the estimate of +$14.900 billion.

Global Trade Concerns Weigh on Market Sentiment

Concerns about US tariffs possibly initiating a global trade war have negatively influenced markets. Recently, President Trump introduced 25% tariffs on imports from Canada and Mexico, while increasing tariffs on Chinese goods from 10% to 20%. However, he granted a one-month exemption for US automakers and compliance-related goods from Canada and Mexico, with a warning of further tariffs on April 2.

Chinese trade data released on Friday also pointed to a downturn, with February exports rising only +2.3% year-on-year versus expectations of +5.9%. Furthermore, February imports unexpectedly dropped -8.4%, marking the largest decline in nearly two years. Market expectations for a -25 basis point rate cut at the upcoming FOMC meeting on March 18-19 stand at around 4%.

International Markets and Bonds Show Divergent Trends

On the global front, stock markets showed declines, with the Euro Stoxx 50 down -0.94%. China’s Shanghai Composite Index fell -0.25% after reaching a two-and-a-quarter-month high. Japan’s Nikkei 225 experienced a substantial drop, closing down -2.17% at a five-and-a-half-month low.

Interest Rates Overview

June 10-year T-notes (ZNM25) experienced a decrease of -7 ticks on Friday, with the 10-year T-note yield climbing +3.9 basis points to 4.317%. T-notes initially rose following the favorable US payroll report but lost ground on the Fed’s hawkish remarks. Fed officials suggested that the current economic backdrop does not necessitate urgent policy changes.

In terms of mixed data from Europe, the 10-year German bund yield increased by +0.3 basis points to 2.836%, while the 10-year UK gilt yield fell by -2.2 basis points to 4.638%. The Eurozone’s Q4 GDP growth was revised upward to +0.2% quarter-on-quarter and +1.2% year-on-year.

German factory orders for January fell sharply by -7.0% month-on-month, significantly worse than the expected -2.5%. ECB Governing Council member Muller cautioned that the ECB should be careful about more interest rate cuts, citing various factors that may elevate prices soon.

Current swaps reflect a 61% chance of a -25 basis point rate cut by the ECB at the April 17 policy meeting.

Market Movers: Chip Stocks Lead Gains

Chip stocks provided strength to the market, particularly Broadcom (AVGO), which surged by +8% after reporting Q1 adjusted net revenue of $14.92 billion, compared to analyst expectations of $14.61 billion. The company’s Q2 revenue outlook also surpassed consensus. Other gainers included ARM Holdings Plc (ARM), which rose over +6%, and Micron Technology (MU) and GlobalFoundries (GFS), both of which increased more than +4%. Additional significant performers included Lam Research (LRCX), Qualcomm (QCOM), ON Semiconductor (ON), and NXP Semiconductors NV (NXPI), all closing higher by more than +3%.

Given market volatility, there has been a notable surge in demand for defensive stocks, especially in the food sector. JM Smucker (SJM) and Campbell Soup Company (CPB) both closed up more than +5%, while Conagra Brands (CAG) gained over +4%. General Mills (GIS) and Hormel Foods (HRL) also saw rises over +3%, with Kraft Heinz (KHC), Archer Daniels Midland (ADM), and Hershey Co (HSY) closing more than +2% higher.

Energy stocks