A busy week ahead, equity markets cheer last weeks tariff walk back.

It has been a strong week for stocks as the markets feel comforted by the further de-escalation of the April 2nd Liberation Day tariff announcements. Investors are becoming more confident that a U.S. economic recession will be avoided and that they have the upper hand over Trump. Any signs that he raises the stakes again will trigger a swift rout in equity markets, and at that point, he will back down. There is a Trump put after all. Having fled from stocks in fear, investors are now strolling back into them with apparent confidence; fund flows are showing strong demand for tech again. So was the whole thing a bad dream? Has there been no lasting damage to the economy despite tariffs leaving the world’s largest economy with the highest trade taxes for 80 years? Could Goldilocks be back in favour? Last week’s PPI data reported that producer prices fell by more than expected. Recent employment data remains resilient, and consumer confidence, according to Friday’s monthly Michigan Consumer Sentiment Survey, pointed to further declines. Putting all that together may further tip the balance in favour of a rate cut in June. Consensus among traders is now for two cuts this year. Easing monetary policy, modest growth, and inflation are heading back to the 2% target. Oh, happy days, one thinks. One has to remember life is not often that simple; when everything in the orchard looks rosy, something often upsets the apple cart.

Where could this upset come from? I have argued that we need to watch the bond market for our lead. U.S. equities are not cheap by any measure, which was fine when interest rates were zero, but when yields rise, equity valuations should adjust. U.S. ten-year yields are now around 4.5%, having risen consistently this year. On Friday, Moody’s downgraded U.S. sovereign debt from its triple-A rating, following Standard & Poor’s and Fitch, in response to the ever-growing U.S. deficit. Which may increase further if Trump gets his tax cuts away.  Does this matter? History is littered with times when a rout in the bond market hits stocks. If bond investors demand better returns to lend money to the U.S. government, investors will want to pay less for stocks.

While we are on topics that may unsettle investor sentiment, Brazil, which makes up about a quarter of global poultry exports, announced it had detected avian flu on a commercial farm for the first time.What is small print on the back pages,often makes the front page in the days to come.

Looking to the week ahead, flash PMI data, which will be released on Thursday, may provide additional insights into the broader impact of the events from the past six weeks on the global economy. We may also learn how April’s payroll tax rise in the UK has affected our domestic economy. Later today, we will receive the latest Euro area inflation report, which would have to diverge significantly from the expected 2.2% for the ECB not to act again at their next meeting. Then on Wednesday, it’s our turn for the monthly price reports. The year-on-year rate is anticipated to jump significantly this month to 3.3% as companies implement higher service costs. Then, we will get retail sales and consumer confidence data on Friday. Equities are opening on Monday on the back foot.