Recap from last week: While CPI eases, tariff policy continues to sour the growth and inflation outlook.
The Feb US CPI report showed further progress on disinflation, with both headline and core CPI slowing more than expected. Headline inflation eased to +2.8% in Feb, while core CPI slowed to +3.1% in Feb, the slowest so far in this part of the cycle. These results, together with the slower monthly increases compared to last year, eased concerns about a repeat of the 2024 strong beginning-of-the-year seasonal inflation.
The underlying drivers of disinflation have flipped in the last few months. The deceleration in annual CPI in Feb was instead led mostly by core services CPI categories with shelter/owners’ equivalent rent and transportation services making the largest contribution to slower inflation. Over the last few months, core goods have no longer provided a deflationary offset.
The PPI also came in lower than expected in Feb, slowing to +3.2% in Feb, from +3.7% in Jan. However, the categories that feed into the Fed-preferred PCE inflation measure indicate that the PPI will likely make a firmer contribution to the PCE result for Feb. So far, the Cleveland Fed inflation nowcast for both headline and core PCE in Feb is +0.19% over the month, which is still marginally lower than the +0.24% core PCE recorded in Feb 2024.
While the CPI report is good news, it is a little backward-looking in the current context. Consumers, businesses, and policymakers have become increasingly focused on an inflation and growth outlook that includes tariffs and cuts to US government spending.
The US Michigan consumer sentiment report (prelim for Mar) showed that the combined effect of policy announcements has weighed further on consumer sentiment this month, with inflation expectations spiking higher, and expectations of unemployment increasing. Will the uncertain outlook prompt more cautious spending patterns? Early signs suggest that it might. One example is Delta Airlines’ cut to its sales and profit guidance for Q1, citing a recent pullback in demand across close-in, corporate, and government bookings.
Recent business surveys have also been impacted by the tariff, trade, and spending cut announcements. The latest addition was the NFIB small business survey for Feb, which showed a fall in sentiment, though still elevated, from rising caution over increased uncertainty in the outlook while reporting more widespread increases in input prices.
The Bank of Canada (BoC) meeting last week underscored the key policy challenge facing policymakers amid tariffs and a potential trade war – deriving the policy direction that balances the “downward pressure on inflation from slower growth or a weaker economy with the upward pressure on inflation from higher costs”.
“Monetary policy cannot offset the impacts of a trade war.” Source: BoC Monetary Policy Decision, 12 Mar 2025
The BoC cut rates for the seventh consecutive meeting. For the moment, inflation in Canada remains near the 2% target, however, the BoC expects growth to slow in Q1 as trade concerns weigh on sentiment and activity. The BoC outlook remained negative, noting that “we ended 2024 on solid footing. But we’re now facing a new crisis”.
Outlook for the week ahead; FOMC, BoJ, BoE, and SNB meetings, US data; growth outlook.
The focus for the week ahead is on key central bank meetings—FOMC, BoJ, BoE, and SNB —along with crucial US growth data. These meetings and US data will now be viewed through the lens of a growth outlook that has deteriorated in recent weeks due to the evolving tariff and trade policy landscape.
It’s becoming increasingly clear that the Trump administration views tariffs not just as negotiating tools, but as instruments for broader restructuring. Furthermore, talk of ‘detoxing’ and ‘transitioning’ the economy through reduced govt spending, coupled with the assertion that ‘corrections are healthy,’ suggests a bumpy period ahead. Uncertainty is weighing on businesses, consumers, and policymakers. The critical question now is: How substantial will the impact be from tariffs, trade policy, government spending cuts, and just rising uncertainty? This week’s data flow will be closely watched, though the combination of Feb and early Mar survey data may still only offer a partial view of any impacts.
Key factors to watch this week;
Key central bank decisions will be in focus this week. Last week, the BoC cut rates on the expectation of weaker growth in Q1 due to trade uncertainties. In contrast, the FOMC, BoE, and BoJ are expected to keep policy unchanged at their meetings this week.
- The FOMC is expected to keep policy settings unchanged. In his last speech before the blackout period, Fed Chair Powell reiterated that the Fed isn’t in a hurry to shift policy, as long as growth holds up, and wants to see the net effect of Trump’s policy agenda on trade, immigration, fiscal policy, and regulation. The FOMC will submit its latest growth, inflation, labor market, and policy path projections. Any shifts in the direction of growth and inflation projections could provide some signal for whether the Fed outlook has changed. In the previous minutes, there had also been some discussion on pausing QT in the future.
- The BoJ is expected to keep its policy rate unchanged, after increasing rates at the last meeting.
- The BoE is also expected to keep its policy rate unchanged at this meeting. The BoE cut its benchmark rate at its last meeting, following a “gradual and cautious” path of rate reductions. While growth had been a little weaker than expected, the Committee aimed to maintain a restrictive stance as inflation risks subsided further.
- The SNB is expected to cut its benchmark rate by 25bps.
Key data this week will provide a more robust update on the US growth trajectory so far in Q1. Currently, the Atlanta Fed GDP Nowcast indicates that growth has slowed early in Q1.
- US retail sales for Feb are expected to rebound by +0.6% over the month, after falling by -0.9% in Jan. The Jan retail control group fell by -0.8% – this is the ,measure that feeds into the GDP result. In contrast, the Chicago Fed US retail sales nowcast suggests a downside surprise of -0.8% in Feb, with the Jan result revised up to -0.4%.
- US industrial production is expected to slow to +0.2% in Feb from +0.5% in Jan.
- Housing starts for Feb are expected to lift slightly to an annualized pace of 1.38m in Feb from 1.366m in Jan. Building permits are expected to slow to 1.45m in Feb from 1.47m in Jan. Amid this lackluster activity in new permits and housing starts, the weekly mortgage applications have been increased notably over the last two weeks (mostly refi’s, but also purchases) given the fall in mortgage rates.
- The first US regional manufacturing surveys for Mar will be released this week and should provide some insight into any changes in sentiment and activity amid the uncertainty over trade and tariff policies.
- We continue to monitor the initial claims release. So far, the trajectory of claims remains little changed. This week, claims are expected to be 222k, up slightly from 220k in the prior week.
Key data outside of the US;
- The Aus labour market report for Feb will be released this week, ahead of the next RBA meeting in several weeks. Employment growth of +30k is expected to keep the unemployment rate unchanged at 4.1%.
- Canada’s CPI for Feb is expected to edge slightly higher. The BoC noted some higher inflation effects due to the end of the GST pause that was implemented over the holiday period. Headline CPI is expected to increase to +2.1% in Feb from +1.9% in Jan. The core trimmed-mean and median inflation rates are expected to remain around +2.7%.
- Japanese National CPI for Feb will be released after the BoJ meeting this week. The BoJ preferred measure is core CPI ex fresh food, and this is expected to ease over the year from +3.2% in Jan to +2.9% in Feb.
This week, the US Treasury will auction and/or settle approx. $591bn in ST Bills, Notes, and Bonds, with a net paydown of -$23bn. The US Treasury will also auction the 10-Year TIPS and 20-Year Bond this week – both will settle on 31 Mar.
QT this week: Approx $3.5bn of ST Bills will mature on the Fed balance sheet and will be reinvested. Approx $6bn in Notes and Bonds will mature and will be redeemed and roll-off the Fed balance sheet.
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
