Last week’s market pulse: Rebounds, rhetoric, and recalibrations

Wall Street fought its way back last week, clawing out a win despite the usual suspects—tariff turmoil and Fed uncertainty—still lurking in the background. The S&P 500 closed up 0.5%, juiced by a 3%+ surge in banks and energy. The Federal Reserve played it straight, keeping rates unchanged (as everyone and their algo expected), but added a cryptic note of caution by flagging “increased uncertainty around the economic outlook.” Translation: we’re flying blind, but holding steady. The dot plot still teases 50bps of cuts for 2025, but beneath the surface, a subtle hawkish drift helped fuel the dollar’s rebound.

Investors spent the week dissecting every economic release, looking for clues as to whether February’s hard data would rebound from January’s malaise or sink deeper alongside deteriorating sentiment. The verdict? Mixed, but far from catastrophic. Despite trade-policy fatigue and souring sentiment from households and firms alike, the U.S. economy remains intact—vulnerable, yes, but not in crisis.

Retail sales didn’t dazzle, with the headline number up just 0.2%, but the control group—excluding food, gas, autos, and building materials—jumped 1.0%, effectively reversing January’s slide. That points to a temporary pause in spending rather than a structural shift, amplified by seasonal noise (bad weather, LA wildfires, and statistical quirks). A rebound in the savings rate—from 3.5% to 4.6%—suggests consumers still have dry powder left, at least for now.

Given the control group’s role in GDP math, we’re now penciling in a solid 0.5% monthly gain in February personal spending, which keeps Q1 consumption on track for a roughly 1.2% annualized increase. Not hot, not cold—just enough to keep recession fears at bay.

Industrial production added a positive surprise, with strength in December through February boosting Q1 growth expectations to a robust 5.9% annualized pace—the best showing since Q2 2021. Utilities and mining led the charge, with manufacturing staging a quieter comeback. Still, this looks more like a cyclical pop than a sustainable surge.

The warning signs? Forward indicators are flashing yellow. Regional PMIs, including the Empire State and Philly Fed, softened sharply as manufacturers brace for stickier supply chains, cost pressures, and slowing demand. The brief honeymoon rally in equities post-election has faded, and so has the early-year optimism.

Across the Atlantic, Europe stole some fiscal spotlight. Friedrich Merz, Germany’s Chancellor-in-waiting, made a bold entrance with a Draghi-style “whatever it takes” moment. Before even taking office, Merz secured Bundestag and Bundesrat approval for a €500 billion mega-package—blasting through the debt brake to fund defense and infrastructure. Included is €100 billion for green energy, with €50 billion allocated to a new Climate Transformation Fund. The package is expected to lift growth by as much as 2% over time, depending on the fiscal multiplier.

Of course, European unity is never guaranteed. The broader €150 billion EU defense fund remains in limbo, with member states split on funding, weapons sourcing, and distribution. Ursula von der Leyen is floating the idea of a centralized “European Military Sales Mechanism”—think vaccine procurement, but with tanks and missiles. Meanwhile, the EU has a €26 billion retaliation plan locked and loaded if U.S. tariffs escalate in April. America, in turn, is threatening 200% tariffs on European alcoholic beverages—bad news for Burgundy and Barolo lovers.

In China, optimism is tentatively on the rise. Retail sales rose 4.0% y/y over the first two months of the year, bolstered by a sweeping 30-point “Special Action Plan” to boost consumption. From rural wage hikes to childcare subsidies and housing asset reforms, Beijing is signaling its commitment to kick-start demand. But for all the ambition, the plan lacks clear monetary impact and faces structural headwinds.

Job market fragility remains the elephant in the room, especially for the 300 million migrant workers facing wage stagnation and limited opportunities due to weak construction and outsourcing trends. Meanwhile, housing woes persist. Home prices across 70 major cities fell 6.6% y/y in February, with many analysts arguing the real drop is even steeper. With 50–70% of household wealth tied to property, the resulting negative wealth effect is weighing heavily on consumption.

To offset the pain, Beijing has turned its attention to supporting equities, but the transition to a consumption-led economy remains a long-term challenge, not a 2025 milestone.

While last week offered relief rallies and improved data, global markets remain at the mercy of policy pivots, trade brinkmanship, and sentiment swings. The bounce is real—but so are the brakes.