The S&P 500 closed at a fresh all-time high yesterday after equities started to lose strength from December onwards. Markets have brushed off concerns that the Fed confirmed in the most recent FOMC policy meeting that it now foresees fewer official interest rate cuts. Since last September, 10-year Treasury rates have risen over 100 basis points to around 4.80% in recent days. Equity markets were pricing in a combination of higher future economic growth and inflation, but also the embedded uncertainty that the Trump administration brings to the policy table. 

Tariffs are inflationary and lead to constraints on economic growth for nations that impose tariffs, as well as the nations subject to tariffs. Therefore, bond investors had been rolling into shorter-dated maturities, causing long rates to rise and weakening the foundation of the equity market. 

As of late, 10-year yields have softened and the U.S. dollar has retreated, relieving negative pressures of uncertainty that had built up since early December. The dollar has weakened by nearly 1.3% this week as President Trump has somewhat toned down his administrative position on tariffs, declaring he would not act on them immediately but would be making that decision more gradually and thoughtfully.

In conjunction with a reprieve from automatic tariff concerns, the dollar has also weakened on the back of a highly anticipated increase in interest rates by the Bank of Japan due to higher year-over-year consumer prices.  With weakness in the dollar as well as long term yields, equities have a positive short-term catalyst to potentially continue higher in the near term.

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