Markets seek fresh catalysts

The US dollar weakened for a second straight session on Friday, while equity markets took a breather after a sharp rally earlier in the week, as investor enthusiasm over the US-China tariff truce began to moderate. Risk appetite cooled slightly, with traders seeking fresh catalysts as economic data pointed to softening momentum beneath the surface.

The greenback lost ground against most major peers, with yen and Swiss franc emerging as beneficiaries of the dollar’s pullback. The 10-year US Treasury yield edged lower, reflecting market pricing for two Fed rate cuts this year, down from three a few weeks ago. The move followed a batch of disappointing US macro data and reaffirmed the cautious tone guiding current positioning.

Global equities had rallied for much of the week, with the S&P 500 gaining 0.4% on Thursday and now sitting just 4% below all-time highs, erasing nearly all losses from last month’s tariff-induced selloff. But Friday’s session was marked by caution, as US futures flattened and Asian equities posted mixed performances—Japan’s Nikkei was volatile, and Hong Kong stocks turned negative after Alibaba’s earnings missed expectations.

Mixed data adds to caution

Economic data reinforced the sense that the post-truce rally may be running ahead of fundamentals. US producer prices (PPI) unexpectedly declined, marking the sharpest drop in five years and hinting that firms are absorbing higher costs rather than passing them to consumers. Retail sales growth also slowed, while factory output contracted for the first time in six months. Additionally, homebuilder confidence fell, highlighting persistent headwinds across sectors.

Fed Governor Michael Barr struck a balanced tone in remarks overnight. While he highlighted the strength of the labor market and disinflation progress, he warned that tariff-driven supply chain disruptions could undercut growth and reignite inflation pressures—especially among small businesses, which are most vulnerable to distribution shocks. Barr compared the potential ripple effects to those seen during the pandemic, emphasizing how “disruptions can have large and lasting effects on prices and output.”

Trade diplomacy enters a new phase

Though the truce between the US and China has removed immediate downside risks, markets remain wary. There is increasing recognition that any comprehensive rollback of tariffs is unlikely. Even as the S&P 500 and Nasdaq 100 rally, traders are grappling with the idea that existing levies will remain in place, with gradual, sectoral negotiations expected instead of a sweeping resolution.

Markets are also eyeing Japan’s upcoming third round of trade talks with the US, as Tokyo seeks to secure exemptions on auto-related tariffs. In exchange, Japan may offer regulatory concessions and increased imports of US agricultural goods. Chief negotiator Ryosei Akazawa is reportedly preparing to visit Washington next week, while Finance Minister Katsunobu Kato will hold G7 side talks with Treasury Secretary Scott Bessent on FX issues.

Market outlook: Seeking stability

Despite the dollar’s pullback and bond market strength, the broader market tone remains constructive. With Fed officials in data-watching mode and geopolitical tensions momentarily easing, equities are consolidating at elevated levels. The Nasdaq 100 has technically re-entered bull market territory, and volatility has compressed across asset classes.

Yet, the absence of a clear new catalyst means investors are shifting their focus back to fundamentals, including earnings quality, forward guidance, and sector leadership. As we may finally get a summer where stock prices reflect business performance—not just policy chaos.