The Macro Outlook for w/c 5 May 2025
Key events this week – FOMC & BoE meetings, ISM & S&P Services PMIs
Recap from last week: The tariff reality begins to bite.
The reality of tariffs appears to be starting to ripple through the US and global economy. The breadth of this impact will depend, in part, on the outcome of tariff negotiations – and so far, there seems to have been little progress on this front. There was, however, talk of a willingness to open negotiations between the US and China last week – a potential first step towards further de-escalation. The broad tariff situation currently facing many US firms is a baseline 10% tariff on all imports from many countries since 5 Apr, tariffs on Chinese imports remaining at an elevated 145%, and uncertainty over multiple negotiations aimed at staving off the much higher reciprocal tariffs before the 8 Jul deadline.
As the trade landscape continues to evolve, the reality of tariffs is now starting to materialize for firms. We are still in that leading-edge stage, relying on forward indicators, survey data, and anecdotes to understand the impending impact. Last week, key manufacturing PMI surveys highlighted an important shift from negative sentiment about anticipated tariffs to concrete anecdotes of firms scrambling to manage the real-time impact on their businesses. The underlying indexes suggested that the impact of tariffs was becoming more widespread among US manufacturing firms. Other key global S&P manufacturing PMIs, including Canada, Mexico, the ASEAN group, Taiwan, and South Korea reflected tariff impacts in the form of deteriorating orders, output, purchasing activity, and falls in future output sentiment. The global S&P manufacturing PMI slipped back into contraction. The services PMIs for Apr will be released this week and these will be crucial to help balance out the view of early-stage tariff impacts on the US and global economy.
A more real-time view of the tariff transmission into economic activity, particularly from slowing trade, comes from recent insightful interviews with the Executive Director for the Port of LA – linked here and here. These interviews highlight a unique perspective of how slowing trade is anticipated to begin affecting sectors of the economy in the near term. One of the important takeaways from the interviews is that progress on trade agreements will be crucial in the coming weeks.
The insights from the Port of LA underscore the ways tariff pressures are beginning to impact trade. The more significant, albeit lagging, “hard data” released last week, provides a broader perspective on these early-stage tariff impacts across the economy. To a degree, the anticipation of tariffs has already impacted the US Q1 GDP. US real GDP contracted as expected in Q1 by -0.3% (annualized), led by the fall in net exports and partially offset by inventories. Both are volatile series and reflect some front running of imports ahead of impending tariffs. Real final sales to domestic purchases (underlying domestic demand) slowed to +0.6% in Q1, from +0.7% in Q4.
Amid fears of tariff-driven inflation, US headline PCE inflation surprised to the downside in Mar. The Feb PCE inflation result, however, saw a moderate upward revision. Notably, monthly inflation slowed to zero in both the headline and core readings in Mar. Annual core PCE inflation decelerated to +2.6%, from an upwardly revised +3% in Feb. These slower monthly and annual inflation rates will likely be a positive sign for the FOMC as it meets this week, though it will likely view the March data as backward-looking and will be more focused on the Apr and May inflation figures to gauge any emerging tariff impact.
Finally, labor market data for Apr beat expectations and continued to suggest that US consumers remain on solid footing as tariff impacts loom. Payroll jobs increased by +177k in Apr, expecting + 129k. The two prior months were revised lower by -60k jobs, however, the 6mth average increased to +193k jobs. The unemployment rate was unchanged at a low of 4.2%. The growth in total hours remained positive and accelerated over the year. The JOLTS survey continued to reflect some vulnerability for the labor market, as labor demand indicators remained subdued. However, layoffs continued to decline. The Challenger Job Cut Announcement survey again pointed to elevated layoffs on the horizon. The leading reason for job cuts this month was “market/economic conditions” taking over from “DOGE” cuts last month. Given the lag effects, more industry-specific weakness may begin to be reflected in the May payrolls report.
The lagging hard data creates a challenging environment for policymakers and could complicate the policy response. How will the FOMC interpret the signals this week? In his last speech (16 Apr), US Fed Chair Powell preferred to keep options open regarding the path of policy rates. At the time, Powell maintained that the economy was “in a solid position” and that his focus was to ensure inflation expectations remained anchored in the face of price pressures from tariffs.
Based on the data last week, and at the time of writing, markets are now pricing in fewer rate cuts this year with the first cut now pushed out to the July meeting (source: CME Fedwatch).
Outlook for the week ahead; FOMC & BoE meetings, ISM & S&P Services PMIs, China Trade Data for Apr
This week, the focus shifts to central banks, notably the FOMC meeting. While it will be a somewhat quieter week for data, two important releases will help assess early-stage tariff impacts. First, the remaining global PMIs will provide a crucial view of service sector activity for Apr, balancing the manufacturing sector perspective on tariffs. Second, the Chinese trade data for Apr, scheduled for release this week, may begin to illustrate an impact on trade between the US and China.
Key factors & events to watch this week;
US FOMC meeting
- The FOMC is expected to keep policy settings unchanged. It will be important to see if there has been any shift in the Fed’s stance on its “wait-and-see” mode. Also important is how the FOMC will characterize the latest view of the economy and tariff impacts.
- There is a range of Fed speeches scheduled for the end of the week.
The BoE will also meet this week – and markets expect a 25bps rate cut at this meeting.
The US ISM services PMI for Apr will be an important counterpoint to the weaker manufacturing PMI last week. This is still survey data but will help to provide some insight into the momentum of the larger services sector of the US economy.
The global S&P services PMIs for Apr will also be released this week.
Canada’s labour market and employment for Apr will be released this week – and may also show some tariff effects. However, expectations are for employment growth to rebound by +24.5k after falling by -36.2k in the prior month. The unemployment rate is expected to be unchanged at 6.7%.
Finally, China’s trade data for Apr may provide some early insight into the trade impact of tariffs. The expected release date is 9 May but could be delayed.
This week, the US Treasury will auction and/or settle approx. $434bn in ST Bills, with a net paydown of -$11bn. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – all will settle next week on 15 May.
QT this week: Approx $13.7bn 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
