Daily Newsletter 5/7/25
Markets are currently flooded with mixed signals. On one hand, persistent tariff tensions are creating uncertainty, while recent earnings reports have further complicated the outlook. Today’s FOMC meeting and rate decision will add yet another layer of information for investors to digest before a clear market direction becomes apparent.
The most important economic event today is the conclusion of the Federal Reserve’s policy meeting, where officials are widely expected to keep interest rates unchanged at 4.25% to 4.5%.
The Fed is in a “wait-and-see” mode, seeking clearer data on how tariffs, inflation, and the labor market will interact before making its next move.
Powell’s main issue with the dual mandate is managing the trade-off between fighting inflation and supporting employment, especially when economic shocks or policy changes push these goals into conflict. This means the Fed could be forced to choose between cutting rates to support jobs or keeping rates high to control inflation, depending on which problem is more severe at a given moment.
We believe that forward guidance will be more important than an actual rate cut at this meeting. Additionally, how Powell addresses the Fed’s independence and responds to the ongoing external pressures will be closely watched.
We do not expect a rate cut today. However, if uncertainty persists and inflationary pressures remain elevated, we believe the Fed will eventually yield to the pressure and cut rates sooner than markets currently anticipate or have priced in.
Senior U.S. and Chinese officials are meeting in Switzerland this week for the first face-to-face trade talks since President Trump imposed sweeping tariffs-145% on Chinese imports, with China retaliating at 125% on U.S. goods.
Switzerland talks are a cautious but important first step toward easing U.S.-China trade tensions, with both sides under pressure from slowing economies and global recession fears. Substantial breakthroughs are unlikely in the short term, but even limited progress could help stabilize markets and reduce uncertainty.
It’s still too soon for the impact to show up in hard data; hard data typically lags behind soft data, which has already been significantly affected.
The Switzerland talks may offer markets some short-term relief. However, given that uncertainty remains high, we believe the risk of a mild recession still persists.
The VIX (CBOE Volatility Index) is trading around 24.60, slightly down from recent highs but still well above its long-term median of 17.6. This elevated level reflects ongoing investor anxiety and heightened market volatility ahead of today’s Federal Reserve rate decision and continued uncertainty from tariffs and trade policy.
OUR TRADES
In the first two trading days of the week, our portfolio is up about 3.6%. While some positions remain in negative territory, substantial gains from Gold ETFs and the German ETF WGQ have driven overall strong performance.
We also secured notable gains from our tactical trades around earnings releases. Several tactical positions remain open, which we may look to close in the next few days.
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