Markets Blog
David Matzko, LPL Research
LPL Research provides its Weekly Market Performance for the week of March 3, 2025. U.S. stocks ended lower as tariff uncertainty and artificial intelligence (AI) scrutiny continued to ripple through capital markets to start the month of March. European stocks ended mixed amid vows for a ramp in defense and infrastructure spending, and Asian markets logged their best week since September. U.S. Treasuries ended lower, as a rout in European bonds drew global attention, while commodities rebounded from last week’s decline.
Index Performance
U.S. and International Equities
U.S. Equities: Major averages ended the first week of March sharply lower after fragile sentiment was weighed down from multiple angles. The benchmark S&P 500 closed 3.0% below the unchanged point, but the Nasdaq faced the most selling, dragged down by tech names, while the Dow earned bragging rights for relative outperformance. Value stocks outperformed their growth counterparts, and small caps also ended with steep losses.
Equities struggled this week from start to finish under volatile tariff headlines. To kick off the month, President Trump doubled the latest round of levies on Chinese goods to 20% while plowing forward with measures toward Canada and Mexico, and all three countries responded with reciprocal tariffs. Most importantly, Beijing unveiled a 15% tariff on several farm products and added a slate of U.S. companies to its unreliable entry and export control lists. Market sentiment was dented, and the risk-off tone was exacerbated by more soft-landing scrutiny early in the week, sparked by tepid ISM manufacturing data. Stocks clawed back some ground mid-week on the back of big tech stocks, but fragile sentiment remained in focus after domestic artificial intelligence (AI) enthusiasm took a hit from a lackluster outlook from chipmaker Marvell Technology (MRVL), colliding with the introduction of Chinese competitor Alibaba’s new model, said to rival the performance of DeepSeek, with much less data.
Nonetheless, Wall Street chatter circled around potential tariff relief for Canada and Mexico following positive remarks from Commerce Secretary Howard Lutnick, which finally arrived Thursday afternoon. Although, despite the White House confirming the one-month delay on USMCA-eligible goods from our North American neighbors, markets continued to struggle after a mixed bag of jobs data on Friday, fueling more choppy trading.
International Equities: Major European markets ended mixed under a flurry of headlines of their own. Defense companies took the spotlight after European leaders pledged to ramp up defense spending to support Ukraine, and shortly thereafter, German Chancellor-in-waiting Friedrich Merz announced the country would amend the constitution to remove defense and security spending caps. The news from German authorities propelled their domestic averages but sparked the largest bond sell-off in decades. On the other side of the coin, stocks faced downward pressure as markets assessed U.S. tariff threats and supply chain risks, while weighing the odds of the European Union (EU) becoming the target for fresh U.S. levies. Additionally, the European Central Bank (ECB) delivered its sixth rate cut of the easing cycle, but investors digested the widely expected tweaks to policy language, suggesting the central bank may be considering a pause next month.
Asian markets sealed their best week since September, after AI enthusiasm and economic optimism in China overshadowed tariff headlines. Greater China led gains after Alibaba unveiled a new AI model, while focus also remained on the National People’s Congress (NPC) meeting. Markets were hoping for clarity around Chinese economic growth and economic stimulus measures, and authorities maintained their 5% growth target for 2025 while reducing their inflation target to 2%, also setting the highest fiscal deficit in over 30 years. The government also rolled out plans to increase sovereign debt issuance, including doubling the funding of a consumer trade-in subsidy program compared to last year, and vowed to support AI development. Elsewhere, Japanese averages ended mixed, and India gained ground. Taiwan and South Korea ended lower, and Australia extended recent declines to close near six-month lows on Friday.
Fixed Income, Currency, and Commodity Markets
Fixed Income: The Bloomberg U.S. Aggregate Index traded lower this week with yields ending higher. The rate-sensitive two-year Treasury yield ended little changed on the positive side, and the 10-year yield ended 11 basis points (0.11%) higher. The recent move lower in yields has primarily been a function of slowing economic growth concerns, not due to lower inflation expectations. Nominal U.S. Treasury yields can be broken out by an inflation component along with economic growth expectations. And since the swearing in of the new administration in January, of the move lower in the 10-year Treasury yield, over three-quarters of the move has been due to lower economic growth expectations, with the small remainder due to lower inflation expectations. Moreover, due to concerns about slowing growth, markets have fully priced in three rate cuts from the Federal Reserve this year, which seems appropriate given the recent ramp in economic concerns.
In other major bond market news, European bonds faced one of the worst routs for non-U.S. developed bond markets since the 1990s. The reason? Europe is confronting two major challenges: the escalation of U.S. tariffs and the increase in military spending. These developments will have major repercussions on European foreign trade and public finances.
The former points to potentially slower growth, but the latter points to increased government spending (which is stimulative) and a lot of government bond supply that will be coming to market as borrowing needs increase. The market’s repricing of government bond yields also potentially complicates the economic growth story in Europe, given the reliance on variable-rate mortgage debt. The net result is likely even higher debt-to-gross domestic-product (GDP) ratios for countries already at potentially precarious levels.
Commodities and Currencies: The Bloomberg Commodities index traded higher this week as the broader commodities complex rebounded from last week’s sharp decline. West Texas Intermediate (WTI) crude ended the week with notable losses, dragged lower as tariff uncertainty weighed on the energy demand outlook, while oversupply concerns rose after OPEC+ stated some halted crude production will resume in April. Gold prices bounced back from last week’s slide, continuing to receive support from haven buying and steady weakening in the U.S. dollar over the last five days, plus slightly weaker-than-expected payrolls growth following Friday’s data. Silver and copper also printed strong week-to-date gains. The dollar moved near four-month lows on economic and trade concerns, as well as relative strength from its peers. The euro jumped on expectations of a rate-cutting pause from the ECB and increased government spending, while the yen also rallied amid Japanese union workers’ demands for higher wages, which could prompt the Bank of Japan (BOJ) to resume rate hikes.
Economic Weekly Roundup
Earnings Outpaced Inflation While Job Gains Remain Stable. Businesses added 151,000 to payrolls in February and average hourly earnings increased 4% from a year ago, outpacing inflation. Employment trended higher in several categories, including health care, financial activities, and transportation and warehousing. Federal government employment declined. The unemployment rate rose to 4.1% and has remained in a narrow range of 4.0% to 4.2% since May 2024. The percentage of workers with multiple jobs is the highest since the Great Financial Crisis. Employment showed little change over the month in other major industries, including mining, oil and gas extraction, construction, and manufacturing.
So far, businesses appear well positioned and comfortable with adding to their payrolls despite the uncertainty with trade, immigration, and geopolitical risks. Given the demand for labor, we should expect unemployed federal workers to find other employment opportunities in short order. One noteworthy trend to monitor is the increasing percentage of workers with multiple jobs.
Services Sector Steadied in February. The services sector grew in February at a slightly slower pace than the previous two months and input prices reaccelerated. Prices paid by purchasing managers rose in February but remained below December levels. Employment grew in February as business activity warranted additional hirings. Some businesses reported concern about tariffs, but they are not reporting any pre-tariff impacts like pulled-forward demand. Sixteen of the 18 services industries reported an increase in prices paid during the month of February. This could be concerning.
Purchasing managers reported higher input prices which hints at growing consumer inflation, an unwanted pressure on the Federal Reserve during a time when the growth outlook has weakened. Policy makers will focus on tactics to keep the economy out of stagflation, perhaps one of the greatest current macro risks.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: New York Fed One-Year Inflation Expectations (Feb
Tuesday: NFIB Small Business Optimism (Feb), JOLTS Jobs Report (Jan)
Wednesday: MBA Mortgage Applications (Mar 7), Headline and Core CPI (Feb), Real Average Hourly Earnings (Feb), Real Average Weekly Earnings (Feb), Federal Budget Balance (Feb)
ThursdaHeadline and Core PPI (Feb), Initial Jobless Claims (Mar 8), Continuing Claims (Mar 1) Household Change in Net Worth (4Q)
Friday: University of Michigan Sentiment Report (Mar preliminary)
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