Week of Apr 13 2025

While policymakers can implement the "bond put" around 5% yields, they lack comparable ability to prevent dollar depreciation, creating an environment where market adjustment flows through currency channels. The 10-year yield's surge simultaneously unwound the massive $800+ billion basis trade, representing a fundamental realignment of global capital flows. Despite the extreme volatility, technical indicators offered grounds for longer-term optimism, with various capitulation indicators reaching levels that historically preceded positive 6-month returns in all but one case since 1929, while the S&P High Beta/High-Quality Ratio triggered signals associated with favorable 6-12 month outcomes.

March inflation data proved exceptionally positive with CPI falling 0.1% and PPI decreasing 0.4% month-over-month, yet this "disinflation for the wrong reasons" appeared driven by demand destruction rather than productivity improvements, explaining the bond market's counterintuitive negative reaction and coinciding with Michigan consumer sentiment deteriorating to 50.8 while inflation expectations surged dramatically. From a technical perspective, key thresholds include the VIX level (33.6, between 1-2 standard deviations above normal), investment grade credit spreads (75bps versus the 100bps potential Fed intervention level), and whether the S&P 500 can reclaim and hold above 5,500.

The left tail macro risk centers on prolonged tariffs leading to stagflationary recession with the Fed constrained by inflation concerns, while the right tail opportunity would emerge from successful negotiations or a pivot to growth-oriented policies. Friday's post-market announcement that the administration would exclude smartphones, computers, and other electronics from the 125% China tariffs enhances this right-tail scenario without fundamentally resolving underlying tensions.

Looking ahead to Week 16's holiday-shortened trading, earnings from major financial institutions and tech companies will provide critical forward guidance, while economic releases including US retail sales and industrial production (Tuesday), China's Q1 GDP (Wednesday), and weekly jobless claims (Thursday) will be scrutinized alongside central bank decisions and Fed Chair Powell's Wednesday speech at the Economic Club of Chicago. Markets will focus on whether traditional correlations normalize, if the dollar stabilizes after breaking key support levels, and how the tech tariff exclusions impact inflation trajectories and corporate earnings prospects as participants navigate this historic inflection point where the bond market, not equities or inflation concerns, now drives economic policy.