Markets generally struck a more positive tone last week, with the policy environment suddenly looking a little more constructive than it has in a while. There were at least three developments that contributed: First, President Trump seemed to back off Federal Reserve (Fed) Chairman Jerome Powell, whom he had attacked a week ago for being too stingy with rate cuts. Second, Fed Governor Christopher Waller mentioned that he would be willing to vote in favor of said rate cuts if it became obvious the economy was weakening too quickly, and third, President Trump hinted that trade meetings were underway with China and that his administration was planning to be “very nice” while negotiating with Xi’s government.

As far as the dust-up with Powell, Trump’s calmer tone is completely understandable. As we discussed here last week, firing Powell is far easier said than done, and the president probably realized that ridding himself of the too-prudently-minded (at least for Trump’s taste) Powell would cost an enormous amount of political capital, unnecessarily perturb markets and would quite possibly fail for legal reasons anyway. Besides, even though Powell will remain a voting member of the Federal Open Market Committee until the beginning of 2028, his term as Fed Chair is set to expire in just over a year, so it seems quite likely that the President realized that grinning and bearing it while waiting for the clock to run out was probably the wisest course.

That helped markets because it removed, at least for the time being, the risk that Fed independence — a cornerstone of U.S. economic exceptionalism — might be unwound. That’s a tail risk almost too scary to contemplate, and it’s hard not to see a sigh of relief written into the margins of the market returns above.

Then along came Chris Waller, who on Wednesday vocally acknowledged what many of his colleagues on the Fed’s Board of Governors were probably thinking anyway (namely, that a significant deterioration in the labor market would make it possible for him to vote in favor of the same rate cuts that Powell was lambasted for not supporting).¹ Again, completely understandable: Remember that the Fed has two jobs — controlling inflation and keeping the economy as close to full employment as it reasonably can. If economic risks become too unbalanced to one side of the equation or the other, the Fed is compelled to react.

So, Waller’s comments might simply have been a re-articulation of the Fed’s so-called dual mandate, and therefore hardly newsworthy in almost any other context. On the other hand, Waller used to be known as one of the more hawkish members of the Board, and his dovish comments helped move him up on the “hawks and doves” spectrum faster than Shedeur Sanders moved down on the NFL’s draft board.² That apparent change of heart by a renowned Fed hawk probably also contributed to last week’s relatively upbeat tone. (It might also have padded Waller’s resume for the upcoming search for Powell’s replacement, but that’s a topic for later...)

And finally, the most pronounced change in tone came from the White House itself when President Trump hinted that talks were underway with China and that the tariffs would come down “very substantially” even if they don’t drop to zero. That was an obvious improvement that markets recognized with a happy little bump higher early on Wednesday. But Chinese officials were quick to point out that no formal negotiations had begun, and Treasury Secretary Scott Bessent hedged a few hours later by noting that no bilateral deal with China was in the works, eventually tempering those gains.

Without a doubt, last week represented a welcome improvement in the tone and tenor of the policy debate that has wracked markets in recent weeks. But even assuming developments remain positive, the question now becomes whether or not enough damage has already been done to tip the U.S. economy into a marked slowdown (or worse, a recession). Last week’s updates of the index of leading indicators and its brainer second cousin, the Chicago Fed National Activity Index (CFNAI), both weakened notably but remain far enough away from levels that would indicate recession to leave all the ambiguity intact.³

But for their part, consumers have already spoken: Friday’s final update of consumer sentiment for the month of April from the University of Michigan showed a slight improvement from the preliminary results released earlier this month but still showed that consumers were more worried about the future than at any point since 2022’s recession scare.⁴ Tariff-related inflation is a big part of that fear — consumer inflation expectations remain off-the-charts high.

Businesses, too, are a little worried. While executives are more circumspect and less-prone to knee-jerk reactions based on shrill-sounding headlines than consumers are, inflation expectations among businesses have clearly broken to the upside — illustrated cleanly by last week’s data from the Atlanta Fed’s business inflation expectations. That report showed firms now expect inflation to rise 2.8% over the next 12 months, the highest in a year.⁵ Profits, too, may come under pressure, a point made by the Atlanta Fed’s data refresh (but far less subtly by its sister bank in Richmond, where the gap between prices paid and prices received by regional manufacturers looked eerily similar to the same chart produced by the Philly Fed a week ago).

But the real story is uncertainty. We could choose any one of probably a bajillion of charts or graphs to illustrate the point, but the Kansas City Fed wrapped it up pretty succinctly last week when it asked businesses in its region how uncertainty has changed since the beginning of the year and just shy of 90% said it has increased either significantly, or merely “more”.⁶ Keeping in mind that the KC Fed’s survey relates only to manufacturers (and only in a very specific region of the country,) it’s a conclusion that was echoed in last week’s Purchasing Managers’ Indices and first-quarter earnings results as well.

Earnings were for the most part okay, but executives from industries as diverse energy, technology and consumer goods all warned that uncertainty related mostly to tariff policy is making it very difficult to forecast future earnings, with things like contract re-negotiations and consumer surcharges even finding their way into conference calls as a way to offset the rising costs associated with tariffs. Many of these executives are dropping future guidance altogether and some, including a big, consumer-focused airline, even announced that as far as it’s concerned the industry is already in recession.

Of course, only time will tell if the policy environment will continue to moderate or, even if it does, whether or not it’s a case of too little/too late to avoid a significant slowdown (or outright recession.) As always, there’s plenty of room to hope — but in the meantime, it seems reasonable to expect markets to remain unsettled for at least a little while longer.

What to watch this week

It promises to be a very busy week, but with at least one consolation: Something might finally push tariff talk out of the spotlight for 24 hours. That, of course, is Friday’s non-farm payrolls report, a big burrito supreme of labor market data that almost always grabs everyone’s attention — more so when results differ widely from expectations. But this month’s report could be important no matter how close the number is (or isn’t) to expectations: If the economy creates fewer jobs than expected, you’ll very likely hear a chorus of voices chirping that the recession they’ve been expecting for two years or more has finally arrived. But if the number comes in close to (or significantly above) the 130-150 that economists are expecting, you’ll probably hear “I told you so” hollered just as loud from the crowd of optimists who have so far been proven right about the economy.

For now, though, it remains very much a “no-hire/no-fire” economy, with businesses so far reluctant to bet decisively in one direction or another with their headcounts. As always, two releases in the run-up to Friday’s data are worth a look on that score: Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) (which attempts to count the number of unfilled vacancies across the economy and has the added bonus of the so-called “quits rate”, which the Fed views as a key indicator of labor market confidence.) Thursday’s layoff tally from Challenger Gray & Christmas is always worth a look, and a big change in either report could rival Friday’s big burrito for supremacy.

On top of that, Wednesday will bring the closely watched income and outlays report. That release is always chock-full of interesting data about where Americans are earning and spending their dough, but recently the figure to watch is the savings rate: If consumers are really as concerned about the economy as they claim, you should see that figure begin to spike as consumers pull in their horns in anticipation of recession. If not, the “no recession” crowd will continue to gloat.

For another view into the minds of corporate executives, Thursday’s final manufacturing PMIs for the month of April will provide it. Last week’s ‘flash’ results weren’t terrible and had only partial evidence that a tariff-related pull-forward in demand has begun to wane. Look also at Thursday’s Chicago PMI, one of the oldest and most-respected surveys that has, at least recently, been a little less upbeat than its peer surveys.

We’ll also get our first look at first-quarter Gross Domestic Product (or GDP,) the gold-standard of economic growth statistics. A big surge in imports immediately prior to the Liberation Day tariff announcement on April 2 very likely took much of the punch out of the figure by making international trade an even bigger negative than it usually is. For that reason, I’d be at least somewhat willing to look past a gnarly disappointment on the headline GDP number and focus instead on the other components like consumer demand.

In the meantime, first-quarter earnings season kicks up a gear, with our first 300-plus day of expected releases on Thursday. Highlights this week include three more of The Magnificents (copyright pending, so back off, Marvel...) with Microsoft expected after Wednesday’s close, and both Apple and Amazon on Wednesday. Consumer-relevant companies on tap this week include McDonalds and Coca-Cola (both on Tuesday,) as well as the company that hosts that most discretionary of discretionary spends, Starbucks. Also of note, it might pay to listen in when parcel delivery company UPS reports results, too — the proportion of discount- to high-value-add services booked by parcel delivery customers has become one of the more interesting ways to cross-hatch what might be occurring in the broader economy.

For companies with an even more cyclical bent, it might pay to listen in when companies like US Steel (Thursday) and Arcelor-Mittal (Friday) release results. Metals demand tends to be pro-cyclical, meaning that a big increase (or drop) in throughput can sometimes hint at broader macro trends. But these days, metal producers have the added distinction of being the tip of the spear in the trade war, giving any forward-looking comments even more weight than usual (and for its part, the on-again/off-again merger talk swirling around U.S. Steel could provide additional insight into the regulatory and political environment surrounding trade.)

For other cyclically oriented views, listen to Caterpillar’s conference call (Wednesday) and several more oil majors, including BP on Tuesday and a handful of integrated U.S. majors on Friday. Also on Friday, Berkshire Hathaway’s Warren Buffet will once again take the stage as analysts and economists comb through the company’s balance sheet to see whether the Oracle of Omaha has deployed any of his massive cache of cash.

As always, when Warren speaks, markets listen.