Stocks Decline Toward Correction Territory Again: March 18, 2025

Equities are drifting back toward correction territory again as investors turn their focus to economic uncertainty and geopolitical turbulence. Technology shares are leading the way south, in part due to folks questioning the potential for earnings deceleration amidst pricey valuations. But today’s economic calendar was on the friendlier side, with housing starts and industrial production arriving well ahead of expectations, while the latter release reached a fresh all-time high. Conversely, a decline in building permits and higher-than-projected inflation data regarding imports and exports tempered the buoyancy stemming from the former prints. Meanwhile, fixed-income watchers are also looking to tomorrow’s Fed meeting and commentary on the central bank’s view of the possible impacts of the Trump Administration’s policies on price pressures and employment conditions. Top of mind will be how many interest rate reductions are anticipated for 2025 in the institution’s quarterly update to its summary of economic projections. Turning to geopolitics, a ceasefire in the Far East is being negotiated between Moscow and Washington as it relates to Kyiv, but a two-month period of peace ended this morning in the Middle East as violence in the region resumed.

Better Weather Drives Construction Recovery

January’s sharp construction retreat was driven by unfavorable weather conditions that nearly reversed completely in February, but applications for future groundbreaking projects declined. The reduction in building permits is consistent with yesterday’s seven-month low in homebuilder sentiment, in which pessimism was reported due to hesitant prospective buyers and anxiety over the potential for further increases in materials costs. The angst isn’t premature, considering that the price of lumber is hovering near a 33-month high.

Housing Starts Beat Expectations

Housing starts rose to 1.501 million seasonally adjusted annualized units (SAAU) in February, a 11.2% month over month (m/m) gain, exceeding the 1.38 million median estimate and the 1.35 million from January. Growth was broad across asset classes with the single-family and apartment building segments growing 11.4% and 12.1% during the period. Meanwhile, the Northeast, South and West drove the gains, increasing 47.4%, 18.3% and 5.9%, but the Midwest tempered progress, declining 24.9% m/m. Still, overall starts are down 2.9% on a year over year (y/y) basis.

Residential Permits Decline

Turning to permits, the headline figure dropped 1.2% m/m to 1.456 million SAAU from 1.473 million in January, but it narrowly beat estimates awaiting 1.45 million. Apartment buildings weighed on total activity but single-family was nearly unchanged, with both segments dropping 4.3% and 0.2% m/m. Results were bifurcated across regions; The Northeast and South slipped 15.3% and 7.6% m/m while the Midwest and South expanded 8.9% and 1%. From a year ago, however, overall permits are down 6.8%.

Administration, Uncertainty Spark Manufacturing Growth

Manufacturing activity expanded strongly last month as goods producers sought to front run Trump tariffs and onshore some of their activities. Industrial production increased 0.7% m/m to a fresh all-time high, trouncing expectations of 0.2% and exceeding January’s 0.3%. The mining and manufacturing sectors climbed 2.8% and 0.9% m/m, but the utilities category limited the uptick, sinking 2.5%. Automobile companies, which have been especially vulnerable to recent trade policies, drove the buoyancy, with an 8.5% m/m jump in production.

Trade Inflation Beats to the Upside

On the inflationary front, trade charges rose in February, arriving above projections for both imports and exports. Import and export prices advanced 0.4% and 0.1% m/m, surpassing the anticipated declines of 0.1% and 0.2%. Under the hood, fuel import costs jumped 1.7% m/m while the non-fuel category escalated 0.3%. In exports, agricultural stickers grew 0.8%, but the non-agricultural component expanded just 0.1%. Overall, however, pressures declined from January, when exports ticked higher by 1.3% m/m. The import segment climbed at the same pace as the prior month.

Stocks Stage Broad Retreat

Stocks are getting creamed as equities experience more selling pressure and traders migrate toward commodities, picking up gold, silver and copper futures. All major equity benchmarks are losing with the Nasdaq 100, Russell 2000, S&P 500 and Dow Jones Industrial gauges trimming 1.6%, 1.2%, 1% and 0.7%. Sectoral breadth is deeply negative with all 11 major segments down and led south by communication services, consumer discretionary and technology, which are suffering drawdowns of 1.8%, 1.8% and 1.4%. Fixed income and currencies are quiet, however, with Treasurys and the greenback near their respective flatlines. The 2- and 10-year maturities are changing hands at 4.04% and 4.30% while the US currency appreciates against the pound sterling, yen, loonie and Aussie tender but depreciates relative to the euro, franc and yuan. In commodities, gold, silver, and copper are higher by 1.1%, 0.7% and 0.4%, but lumber and crude oil are lower by 1.4% and 0.1%. Gold reached a fresh all-time high as it continues to gather safe-haven bids.

Industrial Production in Focus

This morning’s all-time high on industrial production is music to the ears of the Trump administration, which has embraced its short-term pain, long-term gain strategy of repositioning the American economy. Of crucial importance, however, is how durable these gains are, considering that firms have been incentivized to react quickly to the shifting political landscape. Meanwhile, another goal of the Executive Branch has been lower oil prices, and that too has been cooperating with the inflationary story. A continuation of buoyant manufacturing activity amidst softer energy costs may serve to temper the headwinds of trade uncertainty and government spending reductions, which have taken center stage. Finally, tomorrow we’ll hear from the Federal Reserve and view their summary of economic projections. I’m expecting a pause in its benchmark adjusting, but I envision two interest rate cuts anticipated this year, in light of risks concerning consumption deceleration and potential labor market deterioration as a result. 

International Roundup

Inflation Strengthens in Canada

Canada’s Consumer Price Index (CPI) was hotter than expected last month, climbing 1.1% and 2.6% m/m and y/y compared to estimates of 0.6% and 2.2%. Additionally, the headline results accelerated from 0.1% and 1.9% in the first month of 2025. Price gains in February were the steepest in eight months, according to Statistics Canada. The core version of the index, which includes certain items with volatile prices, climbed 0.7% and 2.7% m/m and y/y compared to January’s 0.4% and 2.1% results. The expiration of a sales tax holiday intended to stimulate the economy contributed to the price gains.