3 Things You Need to Know This Week | Global Economy, Treasury Volatility, US Dollar (Apr. 21, 2025)

Transcript

Tim Schluter:

Hello, and welcome to 3 Things You Need to Know this Week. Our regular series designed to help you sift through the noise across financial media and understand what really matters for markets. Here are the three things you need to know this week.

First, insights from global economic indicators.

This week, the World Bank and the International Monetary Fund kick off their annual spring meetings with the expected release of the IMF's updated World Economic Outlook on Tuesday. In January, the IMF revised its 2025 global GDP growth forecast slightly higher. With ongoing tariff fears, the IMF is now expected to lower this year's growth forecast, though it's still expected to stay positive. Given GDP isn't a precise economic measurement, we don't think investors should act upon minor growth revisions. The IMF's economic commentary typically rehashes widely discussed topics, like tariffs, which are already well known risks for stocks. Plus, strong GDP growth isn't necessary for stocks to generate positive returns. Even slow and steady growth can support rising markets.

Later this week, we'll also get a timely pulse check on global economic data. On Wednesday, S&P Global releases April flash PMIs for the US, eurozone and Japan. PMI readings can give us a snapshot of how businesses are doing. Readings above 50 indicate more firms reported expansion, while readings below 50 suggest more firms contracting. We believe PMIs can provide helpful context as recession fears have risen. Last month, composite PMIs, which combine manufacturing and services, indicated expansion in the US and eurozone and contraction in Japan. Notably, the overall global composite PMI, which aggregates results from across 40 countries, has remained expansionary. A good reminder that despite the noise, the broader global economy is moving forward.

Second, US Treasury yield volatility.

US Treasury yields have lurched in both directions since President Trump's bigger than expected slate of tariffs were announced in early April. However, the moves up have gotten more headlines, as many suggest yields should be falling as investors seek the perceived safety of US Treasury bonds. Some bears claim that rising yields could indicate that Treasury market fundamentals are poor, but markets are much more complex, and a closer look at both ends of the yield curve can provide some insight. Yields at the long end of the yield curve are rising, but the short end has remained stable. Shorter term debt tends to be the prime beneficiary of what analysts call a flight to quality, where investors shift out of what may be deemed more risky assets during financial downturns. The longer end of the curve tends to be a function of growth and inflation expectations. So as the president put a 90 day pause on broader global tariffs and markets bounced from recent lows, it makes sense to us to see Treasury yields higher as they respond to rising growth expectations and lower tariff rates.

Right now, most pundits incorrectly deem tariffs themselves as inflationary, and President Trump's Liberation Day announcement rekindled hot inflation fears. To us, this is a classic case of sentiment fueled swings rather than a sign of fundamental trouble. For long-term investors, we think it's important to avoid reacting to short-term Treasury yield volatility and instead stay focused on broader economic trends and maintaining a steady, long-term investment approach.

Last, US dollar trends.

Some are concerned that the weakening of the dollar against other major world currencies signals declining confidence in the US economy and federal government. But recent US dollar trends look like normal currency volatility to us. Notably, the dollar is around lows it reached at various points over the last three years, but remains much stronger than it was during the 20 tens. Historically, the dollar has an interesting relationship with the stock market cycle.

As with economic expansions, the dollar can swing both ways during a bull market, but during bear markets, it usually strengthens not because the strong dollar causes stocks to drop, but because when global financial markets look dicey, you'll see that aforementioned flight to quality. Some worry that the dollar's current dip amid market volatility signals it's no longer a safe haven asset. However, the recent softness in the dollar isn't as dramatic as it seems. It's mostly undoing some of the significant gains it made around the 2024 US election, and is now sitting at levels similar to those seen last September. Six months ago, these levels didn't raise any concerns, and they don't suggest a major issue today either. Instead, it looks more like a natural recalibration rather than a sign of deeper trouble.

And that's it for this episode of 3 Things You Need to Know This Week!

For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit fisherinvestments.com. Thanks for tuning in and don't forget to 'like' and 'subscribe'!