Markets turn to the Fed for clarity

Summary

Last week: markets move higher amid geopolitical tensions

Markets extended their upward trend, with equities posting a fourth consecutive weekly gain. The S&P 500 rose modestly, gaining 0.56% on a total return basis, while Treasury yields moved higher, with the 10-year closing at 4.31%. Oil prices also climbed, with Brent crude reaching approximately $105 per barrel, driven by escalating geopolitical tensions and the U.S. blockade of the Strait of Hormuz.

Those tensions intensified over the weekend as U.S.-Iran negotiations broke down, reinforcing uncertainty in energy markets and adding another layer of inflation risk.

Growth slows as inflation pressures persist

Economic data pointed to a more complex backdrop. Growth slowed meaningfully, with Q1 GDP near 0.5%, while softer durable goods and housing data suggested cooling business investment and weaker rate-sensitive demand. At the same time, labor markets remained stable and consumer confidence improved slightly.

Inflation, however, showed signs of persistence. Core PCE and PMI price components indicated that disinflation has stalled, with rising oil prices adding renewed pressure. Taken together, the data continues to resemble a stagflationary mix of slower growth and firmer inflation.

Policy uncertainty also increased. Kevin Warsh’s confirmation hearing highlighted a more hawkish potential policy regime and reinforced the Fed’s independence. Meanwhile, workforce reductions across major technology and media firms signaled ongoing capital reallocation toward AI and efficiency initiatives.

This week: the Fed takes center stage

The Federal Reserve meeting is the focal point this week, with the decision expected Wednesday. Markets broadly anticipate no change, with the fed funds target range likely to remain at 3.50% to 3.75%.

With a pause already priced in, attention will shift to the Fed’s messaging. The key question is whether policymakers maintain confidence in the current path or signal greater concern about persistent inflation and rising energy costs. Any shift in tone, particularly around inflation durability, growth risks, or the conditions for future moves, could drive market reaction.

Data to watch: headline strength, underlying caution

Economic releases will help frame the Fed’s outlook. Q1 GDP is expected to rebound to 2.1% annualized, though underlying details point to softer momentum. Personal consumption is projected to slow to 1.5%, suggesting more cautious consumer activity beneath stronger headline growth.

Durable goods orders are expected to rise 0.5% month over month, following a -1.4% decline, while orders excluding transportation are projected at 0.4%, down from 0.8%, suggesting the underlying trend may be less robust than the headline.

On the consumer side, confidence is expected to fall to 89.4% from 91.8%, reflecting heightened price sensitivity and geopolitical uncertainty. Labor market data remains stable, with jobless claims expected at 212,000 versus 214,000 previously, showing only modest improvement.

What it means: a market waiting for confirmation

Overall, the week’s releases argue for a market still caught between firmer headline growth, softer sentiment, and a Fed likely staying on hold while it waits for cleaner disinflation evidence.