Week of Apr 06 2025

The Federal Reserve faces an extraordinary policy dilemma between rising inflation and slowing growth. Chairman Powell acknowledged tariffs will mean "higher inflation and slower growth" and warned that tariff-related inflation might not be "transitory." Meanwhile, Fed Funds Futures indicate a 56% probability of 100+ basis points in cuts this year, even as President Trump publicly demands immediate rate cuts. Further complicating matters, the Senate published reconciliation instructions for a tax bill with $1.5 trillion in cuts and minimal spending reductions, potentially adding $7 trillion to the deficit over the next decade. BofA's "Deficits to the moon" forecast projects deficits reaching 7.1% of GDP in FY 2026, well above consensus estimates.

Fund flows show defensive positioning with $22.5 billion moving to cash, $9.4 billion to bonds, and $2.5 billion to gold. Year-to-date returns display a clear flight to safety: gold (+17.8%), government bonds (+5.3%), and investment grade bonds (+4.2%), while stocks have fallen 3.5% and cryptocurrencies have plummeted 33.6%. Key technical thresholds include support at 5,500 for the S&P 500, CTA pivot levels at 5,830 (short term) and 5,860 (medium term), the VIX at 30.0 (well above the "consider buying" threshold of 27.3), the SOX semiconductor index needing to rebound above 4000, and the XBD broker-dealer index holding its 200-day moving average at 262.

Left tail risks center on tariffs remaining in place, leading to stagflationary recession, potentially exacerbated if the Fed cannot cut rates due to persistent inflation. Right tail risks depend on a rapid "Reconciliation Day" scenario where tariffs prove shorter-lived than feared, with negotiations reducing rates or shifting focus to growth-oriented policies.

Week 15's catalysts include FOMC minutes (April 9th), March CPI (April 10th, forecasted at 0.1% m/m headline and 0.3% m/m core), PPI (April 11th), and preliminary University of Michigan Consumer Sentiment. Markets will remain hypersensitive to signals regarding tariff modifications, international retaliation, or policy shifts that might halt the market's decline.