Once again, the week’s economic activity was driven by headlines and continued geopolitical tensions between the U.S., Israel and Iran. Markets were volatile to start the week when President Trump threatened to annihilate Iran if they failed to comply with his deadline for a ceasefire agreement. However, a last-minute agreement resulted in a two-week pause in hostilities. On Wednesday, equities gained 2-3% across all indices, bond yields fell about 10 bps across the curve and oil fell back below $100/barrel as markets shifted to “risk-on” mode. Thursday brought Iranian accusations that the U.S. was not complying with the agreement and oil kicked back over $100/barrel again as equities sold off.
Beyond the effects of war, AI managed to sneak in a headline this week when Treasury Secretary Scott Bessent and Fed Chair Jerome Powell summoned bank CEOs to Washington for a previously unreported meeting. Anthropic’s Mythos and other AI programs were the topic of conversation in the context of threats to the national financial system. To date, Mythos has only been selectively released to a few large companies, exuding their own prudence about the potential threat the software creates. The short notice, unreported nature of the meeting likely signifies that top financial regulators view Mythos-level AI as a potential threat to global financial stability, capable of being used by hackers to execute sophisticated attacks on major banking systems.
Minutes from the March FOMC meeting underscored the Federal Reserve’s careful and data‑driven approach to adjusting interest rates. Policymakers broadly agreed that although inflation pressures have moderated, they remain elevated enough to justify restraint before altering policy. Participants characterized recent disinflation as a positive but uneven development. They also stressed the need for clearer evidence that inflation is on a durable path toward the 2% target prior to initiating rate cuts. Their discussions reflected concern over the potential inflationary impact of geopolitical tensions and stable conditions. In so many words, the Fed’s rate narrative has shifted from cuts meant to accommodate labor to effectively pausing until they know more. Interest rate futures continue to hold a rate move until 2027.
The third and final revision of Q4 GDP was worse than the last, reporting 0.5% annual growth after the previous revision from 1.3% to 0.7%, and a marked slowdown from Q3’s 4.4% figure. While consumer spending and private investment continued to support growth, those contributions were more than offset by a pronounced pullback in government spending – largely linked to the federal shutdown – and weaker exports, even as imports declined. The downward revision was driven primarily by softer investment activity, underscoring how policy disruptions and slowing demand weighed on overall economic performance late in the year.
KEY INDICATORS THIS WEEK
Inflation - CORE PCE matched consensus estimates at 3.0% YoY and 04% MoM.
Next week - PPI and Beige Book.