U.S. stocks rebounded across the board last week, with Fed Chair Powell reiterating that he is not in a hurry to cut rates. Investors are weighing the Trump administration's tariff policy as U.S. Treasury yields decline. Meanwhile, risk appetite has warmed, with the Nasdaq returning to the 20,000-point mark after three weeks.
In the short term, the disturbances caused by tariffs will continue, and the flow of funds into U.S. stock funds has shown some fluctuations, but the marginal effects of these impacts seem to have weakened. Many investors are waiting for actual effects to materialize rather than acting prematurely, and the game regarding the outlook for the Fed's monetary policy continues.
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The Fed reiterates its cautious stance.
Affected by rising food and service prices, the closely watched U.S. inflation data for January exceeded expectations. The U.S. Consumer Price Index (CPI) rose 0.5% month-on-month, reaching a year-and-a-half high. Meanwhile, the Producer Price Index for January, a leading indicator of upstream costs, increased by 0.4% month-on-month, accelerating by 0.1 percentage points from the previous value.
Meanwhile, the U.S. job market remains stable, with initial jobless claims dropping by 7,000 to 213,000 last week. So far this year, this indicator has shown an overall downward trend, consistent with the current historically low layoff rate. Although layoffs are minimal, job opportunities for the unemployed are not as plentiful as they were a year ago, and businesses are taking a wait-and-see approach.
Given the current price and employment environment, the Fed may choose to pause rate cuts while assessing the impact of Trump's policies. Fed Chair Powell expressed a cautious stance last week during his testimony at the semiannual monetary policy report hearing on Capitol Hill, stating, 'We are close to inflation but have not yet reached the target inflation level.' He also added, 'We wish to maintain the current policy restrictions.'
Mid- to long-term U.S. Treasury bonds have pulled back after reaching highs, with the 2-year Treasury yield, closely related to interest rate expectations, dropping 1.9 basis points to 4.258% this week, while the benchmark 10-year Treasury yield fell 0.8 basis points to 4.475%. Federal funds futures indicate that the Fed's rate-cutting space remains around 40 basis points this year, meaning that two cuts are still not fully priced in.
It is noteworthy that hawkish voices have emerged again within the Fed. Dallas Fed President Logan reiterated last week that even if inflation approaches the Fed's 2% target in the coming months, the Fed may not necessarily lower rates in response. 'I think the extent to which monetary policy is restrictive is a real question. Therefore, we need to be cautious,' Logan stated, noting that it remains unclear whether inflation will truly cool in the short term, pointing out the pattern of higher inflation rates in early years, when companies typically tend to implement price increases.
Jefferies Chief U.S. Economist Thomas Simons stated: "Powell has shifted the Fed's rate-cutting mode to a 'not in a hurry' mode. The rise in long-term interest rates is not solely due to investor concerns about inflation."
TD Securities wrote in a report sent to reporters that the labor market is resilient, and household balance sheets are strong, which means consumer spending will grow steadily in 2025. Although the surge in tariff threats has brought some uncertainty, the Fed hopes to tread carefully as it does not know what the neutral funds rate should be. Some Fed officials have incorporated tariffs into their forecasts, but the specific impacts remain to be quantified further.
Tech stocks are leading the market.
Despite being affected by tariff news, fluctuations in economic indicators, and higher-than-expected Consumer Price Index (CPI) factors, U.S. stocks stabilized and rebounded last week, with the S&P 500 index crossing the 6,100 mark to reach a new milestone.
Dow Jones market statistics show more sectors gaining than losing. The technology sector led with a 3.8% increase, followed by the communication services sector up 2%, while materials, consumer goods, energy, and utilities rose more than 1%. The artificial intelligence industry continued its strong momentum, with AMD increasing 32% this week, as the company's sales guidance for fiscal year 2026 exceeded market expectations, and Intel rose 24%. U.S. Vice President Vance stated that the 'most powerful' AI systems need to be built in the U.S. Only two sectors declined, namely healthcare and finance.
Investors continue to focus on tariff prospects. Trump has requested that equivalent tariffs be set for imports from all U.S. trading partners. U.S. Commerce Secretary nominee Luthnick stated that related research will be completed by April 1.
The flow of funds indicates that investors have withdrawn from stock funds for the second consecutive week, marking the fifth time in six weeks. Rising inflation pressures, weak economic data, and concerns over Trump's equivalent tariffs have suppressed risk appetite. Data provided to reporters by the London Stock Exchange Group (LSEG) shows a net outflow of $2.25 billion from U.S. stock funds over the past week.
J.P. Morgan remains optimistic about the outlook for U.S. stocks. 'The fluctuations around DeepSeek and concerns over tariffs have not undermined our positive outlook for risk assets, especially in the U.S. In the short term, we expect the headline on U.S. tariffs and the potential passage of April's legislation to continue to be volatile, but we still set 6,500 as the end-of-year target for the S&P 500 index,' said Fabio Bassi, Head of Cross-Asset Strategy at J.P. Morgan, in a report to clients.
Charles Schwab wrote in its market outlook that despite higher-than-expected inflation data and new tariff announcements, U.S. stocks still achieved gains. It remains unclear how long the tariffs will be implemented, whether they are just a negotiation strategy, and whether they will ultimately have any inflationary effects. The market seems willing to ignore any potential consequences unless they are reflected in economic data.
The agency believes that as long as economic data and earnings growth expectations remain unchanged, the 10-year Treasury yield, still below the mid-January high of 4.80%, suggests that the stock market may maintain a bullish tendency. There are no significant market-moving catalysts before the February 26 NVIDIA earnings report or the February 28 personal consumption expenditures (PCE) data release. Overall, the U.S. stock market is in a higher-risk environment, but as long as the tariff impact is manageable and (U.S. Treasury) yields continue to slow, it will be beneficial for the stock market.