Key takeaways
- Financial markets oscillate as investors digest new developments in Iran war
- Manufacturing sector exhibits resilience
- U.S. labor markets show tentative signs of stabilization
Publishing ahead of the Good Friday holiday weekend.
Financial markets oscillate
Geopolitical developments in the Middle East continued to drive market performance. On Monday, rumblings that negotiations were taking place between the U.S. and Iran fuelled a significant rebound in equity markets. The S&P 500 Index climbed nearly 3% on the last trading day of Q1, while the Russell 2000 Index climbed nearly 3.5%.
Overall, the first quarter was a split screen performance by global equity markets. In the first two months of the year, non-U.S. stocks outperformed U.S. stocks by roughly 10 percentage points. But in March, non-U.S. stocks underperformed by 6 percentage points as investors weighed the potential asymmetric impact of the war on various economies.
Uncertainty continues to remain elevated. On Wednesday evening, U.S. President Donald Trump gave a speech in which he indicated the war could wrap up shortly, but even so, it might persist for another 2-3 weeks. U.S. equity markets sold off overnight and into regular trading on Thursday morning, but market reaction flattened out towards the middle of the trading day amid reports that Iran and Oman might develop a joint monitoring protocol for ships in the Straits of Hormuz.
With equity markets being oversold but not yet panicked, we continue to believe that investors would be well-served by sticking close to their strategic asset allocations, rather than making large tactical tilts.
Global manufacturing exhibits resilience
Despite the uncertainty caused by the war in the Middle East, the global manufacturing sector continues to exhibit strength. The Institute for Supply Management (ISM) Manufacturing PMI was 52.7% in March, edging higher from the February reading and coming in above consensus expectations. The New Orders subcomponent, often viewed as a leading indicator, was also in expansionary territory.
Outside of the U.S., the final Purchasing Managers’ Indices (PMI) data for March confirms some of the strength seen in the preliminary data released the previous weeks. Eurozone Manufacturing PMI published by S&P global rose to 51.6 in March, the highest level since mid-2022. Meanwhile, manufacturing activity in the United Kingdom accelerated at a slower pace in March compared to February, but still remained in net expansionary territory.
The resilience in global manufacturing is an encouraging silver lining during this period of heightened geopolitical risks.
U.S. labor markets show tentative signs of stabilization
U.S. labor markets are showing tentative signs of stabilization after the weak February payrolls report. Private sector data from Revelio Labs showed that the U.S. economy likely returned to net job creation in March, while job creation data from ADP came in above consensus expectations. In addition, private sector data from Gusto suggested that small businesses in the U.S. hired employees at the fastest pace since 2022.
Investors of course will also be paying close attention to the official March non-farm payrolls data that will be released on Friday. Should the payroll data match or exceed the consensus expectation for 60,000 jobs to be added, it would be yet another encouraging sign of the strength of the U.S. economy, and reinforce that the Federal Reserve can afford to remain on an extended pause with interest rate movements.
U.S. markets will be closed when the payrolls data is released. This will also give investors more time to go beyond the headlines and dig into the details of the report. One key watchpoint: whether job creation can become more broad-based and expand beyond just the defensive sectors. The private sector data are leaning in this direction, but investors will need to see if the official payrolls numbers confirms this trend.