The Macro Outlook for w/c 3 March 2025
Key events this week – US labor market for Feb, Fed speeches, ISM surveys, ECB meeting, China NPC, and tariff announcements
Recap from last week: Progress on inflation and the evolving US economic outlook.
As we approach the next FOMC meeting on 18-19 Mar, the US economic landscape continues to evolve. Data last week showed encouraging signs of slowing underlying inflation in Jan, yet simultaneously cast doubt on the narrative of the robust economic expansion, a concern currently based on limited hard data. This week, we add the critical US labor market component for Feb to our analysis as we build a more comprehensive view ahead of the Fed’s upcoming decision.
At its last meeting, the FOMC maintained its policy stance, citing the need for further disinflation progress before considering rate cuts, supported by a solid labor market and economy. The Jan PCE inflation data showed encouraging signs of progress on disinflation, coming in below expectations. Core PCE inflation slowed to +2.65% over the year, a step down from +2.9% in Dec, and below the +2.8% rate where it seemed to stall through late 2024. Seasonality was a key consideration in this report and importantly, monthly inflation data moderated compared to the higher figures of a year ago. This is a development that is likely to be welcomed by the FOMC. While core goods inflation remained relatively firm, core services inflation, a key area of concern, showed signs of easing. Specifically, core services inflation slowed to +3.4%, and core services excluding housing also slowed to +3.1%. Despite these positive developments and the general progress on disinflation, short-term annualized rates suggest that further disinflation may proceed at a more gradual pace.
However, the elevated inflation rate at the end of 2024 was not the only concern on the inflation front for the FOMC. The Committee was also worried about the upside risks to the inflation outlook from the potential impact of tariffs and changes to immigration policy. The uncertainty around policy has yet to be resolved, so this may still weigh on the FOMC decision.
Beyond policy concerns, the data may already be reflecting potential tariff-related pressures, clouding the economic outlook. The threat of tariffs appears to coincide with two developments. The first is the emergence of rising cost pressures observed in the US S&P prelim PMI report for Feb and now also across the regional manufacturing surveys for Feb, suggesting that price increases on raw materials became more widespread in Feb (including the Dallas, Kansas, Empire State, and Philadelphia Fed manufacturing surveys for Feb).
The second was the notable step down in the US growth outlook for Q1. The Atlanta Fed GDP nowcast for Q1 GDP growth shifted sharply lower from +2.3% growth at the start of the week to a -1.5% contraction by the end of the week. The key driver of that decline was the increase in the goods trade deficit led mostly by a +32% increase in imports of industrial supplies for the month – possibly reflecting orders to front-run potential tariff price increases.
However, the fall in personal spending for Jan also contributed to the weaker growth outlook. While this fall was expected based on the Jan retail sales results, it does raise some uncertainty over the outlook for consumption growth. So far, it’s one month of weaker consumption spending and comes off the back of four months of much stronger growth leading into the end of 2024. Personal income growth was stronger than expected in Jan, led higher (in nominal terms) by cost-of-living adjustments on transfer payments, but labor income growth also remained stable.
Given the uncertainty over the growth outlook and some improvement on inflation progress, markets are now pricing in almost three rate cuts this year (at the time of writing), with cuts to resume in Jun (Source: CME FedWatch).
Outlook for the week ahead; US labor market for Feb, Fed speeches, ISM surveys, ECB meeting, China NPC, geopolitical and tariff headline risk.
Given this uncertain US growth backdrop, the US labor market data for Feb, and what it means for income and growth, will be crucial for understanding the evolving economic backdrop. Ahead of the blackout period next week, there are also several key Fed speeches which will provide some context for how Fed members are thinking about the economic outlook.
Key factors to watch this week;
US labor market conditions in Feb
- US non-farm payrolls for Feb are expected to increase by +156k, slightly higher than Jan at +143k. The direction of revisions will be important.
- The unemployment rate is expected to be unchanged at 4% in Feb versus 4% in Jan.
- The average weekly hours are expected to increase back up to 34.2 hours in Feb from 34.1 in Jan.
- Average hourly earnings are expected to slow to +0.3% over the month, from +0.5% in Jan, but remain unchanged at +4.1% over the year.
- On more of an anecdote front, the Challenger Gray Job Cut Announcement survey for Feb may provide some further insight into labor market conditions.
- We continue to monitor initial claims data to gauge the impact of government layoffs.
- The JOLTS survey for Jan will be released on 11 Mar.
US data releases this week will primarily focus on production for Jan and Feb with a combination of hard and survey data.
- The ISM manufacturing and services PMI for Feb will be released – and it will be important whether they confirm the direction of the S&P Prelim PMIs for Feb (which recorded a notable slowdown in services activity in Feb).
- The Fed Beige Book may provide some important anecdotes about consumption, growth, prices, and the labor market since the last release on 15 Jan.
- US Factory Orders for Jan are expected to increase by +1.5% in Jan after falling by -0.9% in Dec. The advance durable goods orders for Jan increased by more than expected due to an increase in the larger value aircraft orders in the month.
The final US Fed speeches before the blackout period next week, ahead of the FOMC meeting on 18-19 Mar.
- US Fed Chair Powell will give a speech on the Economic Outlook on Fri 7 Mar.
- Fed Governor Waller will also give a speech on the Economic Outlook on Thur 6 Mar.
- The Fed Vice Chair Williams is also scheduled to give several speeches this week.
- There will also be a range of other speeches on Fri 7 Mar by Governor Bowman and Kugler.
The ECB is expected to cut rates this week;
- The ECB will kick off the next round of central bank meetings this week. Markets expect the ECB to cut rates by 25bps to 2.5%. The minutes of the last meeting showed that the Governing Council agreed that the disinflation process was well on track, while the growth outlook continued to be weak. Services inflation was widely seen as the key inflation component to monitor during the coming months. Last week, the Jan Euro area services inflation remained stuck at +3.9%, however, the negotiated wage rates easing in the Dec quarter could give the ECB some comfort over the outlook for services inflation.
- The prelim Euro Area CPI for Feb is expected to show underlying inflation slow further to +2.5% from +2.7% in Jan.
Data outside of the US;
- Australia’s GDP for Q4 is expected to increase to +0.5% over the quarter, lifting from +0.3% in Q3. The latest RBA minutes for the 18 Feb meeting will be released.
- Canada labour market update for Feb; net employment growth is expected to slow to +18k in Feb.
The full suite of S&P global PMIs for Feb will be released this week.
Further news on tariffs for China, Canada, and Mexico is expected this week – and headline risk remains elevated.
At the same time, the Chinese National People’s Congress will take place in Beijing this week – and stimulus measures are expected to be announced together with the key economic targets for the year (source: Bloomberg 3 Mar 2025).
This week, the US Treasury will auction and/or settle approx. $469bn in ST Bills, with a net paydown of -$6bn.
QT this week: Approx $2.4bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
