Wall Street whipsaws on data and trade headlines, yen slides after BoJ

US economy shrinks in Q1, inflation still a problem

The US economy unexpectedly contracted in the first quarter of 2025, falling by an annualized rate of 0.3% q/q against forecasts of a 0.3% increase, marking a not so great start to President Trump’s second term. Under the hood, things weren’t as bad as they seemed as consumers continued to spend and the main drag on the data was the surge in imports as businesses frontloaded their purchases ahead of the hike in tariffs.

Personal consumption slowed over the quarter, but it did accelerate slightly in March, rising by 0.7% m/m. The main worry is that inflation remains sticky, with the Fed’s favourite gauge – the core PCE price index – revised higher for the previous three months to give an elevated reading of 3.0% y/y in February.

On the bright side, core PCE eased to 2.6% y/y in March as expected. Nevertheless, it’s hard to deny the signs that the US could well be headed towards a stagflationary period. Even if growth rebounds, it can only make a sluggish comeback amid all the uncertainty created by Trump’s constant flip-flopping on tariffs, while inflation is more likely to head higher in the coming months.

The ADP employment report that was also released yesterday pointed to a notable slowdown in the labour market, with the private sector adding 62k jobs in March instead of the projected 115k. All eyes are now on Friday’s nonfarm payroll numbers as well as the ISM manufacturing PMI later today.

Trade deal hopes lift Wall Street

Stocks on Wall Street initially tumbled on the data, as stagflation concerns weighed heavily on sentiment and recession odds went up, leading investors to raise their bets of a full 100-basis-point rate cut by the Fed before the year end.

However, shares staged a remarkable rebound, with the Dow Jones and S&P 500 finishing Wednesday’s session higher, while the Nasdaq recouped most of its earlier losses.

The mood started to improve after the White House Trade Representative Jamieson Greer told Fox News yesterday that the US is close to announcing a tranche of trade deals, possibly within weeks.

Trump also sounded hopeful about reaching deals with other countries, although he also indicated that he’s not in a rush and won’t be backing down on the steep tariffs easily. On China, Trump said “we’re going to make it on our terms”, but investors cheered separate reports from Chinese media that the US has reached out to Beijing for talks on trade.

Tech earnings impress, more on the way

US futures are up today, getting an additional boost by strong tech earnings from the likes of Microsoft and Facebook parent Meta Platforms that came after Wednesday’s market close. Both Microsoft and Meta topped their earnings estimates, with the former enjoying robust growth in its cloud unit and the latter benefiting from strong ad revenue.

The Big Tech theme continues later on, as Apple and Amazon.com are next to report their latest results after the closing bell. Microsoft and Meta have set the bar high as not only did they smash all expectations, but they were also quite bullish about the current quarter. Apple and Amazon may not be so lucky but for today at least, Wall Street is on track to extend its recovery.

Dollar climbs for a third day, gold sinks

Optimism about trade deals is also spurring a rebound in the US dollar despite the doubts about the economy and dovish Fed expectations. The dollar index is climbing for a third straight session today in quiet trading, with many markets closed for the May Day holiday.

The greenback’s unexpected strength is weighing on gold, which has slipped by more than 1.5% today. The positive headlines on trade seem to be inflicting significant damage on the precious metal. News that the US and Ukraine have finally sealed an agreement on sharing mineral resources as well as on establishing an investment fund may be adding to the selloff.

Yen down as BoJ uncertain about rate hike timing

The yen is underperforming on Thursday and this is probably exaggerating the dollar’s bullishness. The Japanese currency came under pressure after the Bank of Japan held interest rates unchanged today, which was expected, but downgraded both its growth and inflation forecasts.

The BoJ sees inflation falling below its 2% target in 2026 before picking up again in 2027, prompting investors to pare back their expectations of a 25-bps rate hike later this year. In his press briefing, Governor Ueda seemed to tie the timing of the next rate increase with how the tariff war plays out, suggesting the Bank anticipates a substantial impact on the economy either way.

The yen was last trading at 144.25 to the dollar.