The Macro Outlook for w/c 9 June 2025
Key events this week; US CPI & PPI May
Recap from last week: Policy Impacts
We are at an early point in the policy cycle where significant new policy changes are beginning to be reflected in US economic performance. Our focus remains on tracking shifts in the US economy’s progress, mindful of the potential for higher inflation, slower growth, and distortions stemming primarily from evolving policy. This past week provided two important updates. The first was the May US labor market update, crucial for understanding the outlook for household spending. The second was an update on business activity and sentiment, examining how private sector firms are faring amid ongoing uncertainty and disruptions surrounding the new tariff regime.
US labor market data for May was mixed. Across payrolls and the household survey, there was not a sharp deterioration, but certainly some cooling in conditions. Other labor market reports indicated warning signs still on the horizon.
US non-farm payroll growth came in close to expectations at +139k in May, with a notable downward revision of -95k for the prior two months. The 12-month average slowed to +144k – the slowest of this cycle. While payroll growth slowed, the details this month still seem to mostly reflect a lack of hiring, rather than active retrenchment or layoffs.
The industry view of payroll growth suggests that policy-led initiatives may be having an impact. This is primarily evident in the split between govt and private payrolls. The growth in govt payrolls has slowed to an average of zero since Feb 2025 (DOGE cuts) – down from the average of 38k/month during 2024. This has affected the overall growth in non-farm payrolls since Feb. Importantly, total private payroll growth remained at +140k in May – just above the 2024 average growth of +130k. Annual growth in private payrolls has remained fairly steady around +1.1% since Aug 2024, but this is still the lowest of the current cycle.
Within the private sector, it’s more unclear the degree to which policy-led changes are beginning to impact payroll growth. In most cases, tariffs are likely to exacerbate existing pockets of weakness – especially in manufacturing and construction. Importantly, private payrolls are still growing on a year ago basis across most industries, with annual declines recorded in only three industries – manufacturing, professional and business services, and information.
In May, manufacturing (-8k) and professional & business services (-18k) recorded the only substantial falls in payrolls for the month (of >1k). The weakness in manufacturing payrolls has been in place for almost two years – with payrolls declining on an annual basis since Oct 23 – led by durable goods industries – indicating other factors at play. However, tariff disruptions may exacerbate this trend in the short term.
Two other key industries have recorded slowing payroll growth. Construction payrolls have slowed more notably since Oct 2024 and will likely be exacerbated by tariffs, but also impacted by interest rates. Trade and transportation payroll growth has slowed over the last 3 months – possibly more aligned with the new tariff regime.
Payroll growth in only three industries (narrow breadth) more than offset these falls this month; private health & education, leisure & hospitality (especially in the last 3 months), and the recovery in financials – all contributing a combined +148k payroll increase in May, which was most of the increase in private payrolls.
The household survey showed a notable fall in the number of persons employed in May – almost matched by a fall in the size of the labor force, as persons left the labor force. This still resulted in a small increase in the unemployment rate from 4.18% to 4.24%. The flows to unemployment were more concerning with a larger flow from “employed” to “unemployed” (equal high for this part of the cycle), plus a further increase in persons remaining in unemployment from the prior month. The growth in hours worked remained steady over the month.
Other labor market reports suggest that further labor market weakness may still be on the horizon. The JOLTS report for Apr (lags by a month) did indicate some emerging weakness in layoffs, but hiring still increased. Initial jobless claims remained elevated – and continuing claims remained unchanged at 1.9m suggesting that weakness in hiring is persisting. The Challenger Job Cut Announcements remained elevated in May and there was a notable shift in the leading reason for job cuts; from DOGE actions to ‘market/economic conditions’ and ‘closing’. The Fed Beige Book highlighted “widespread” comments of delayed hiring plans due to uncertainty, with all districts noting lower labor demand and declining hours and over-time. Reports of layoffs were still not pervasive.
The important point for the labor market outlook right now is how firms are faring amidst policy changes, disruptions, and still elevated uncertainty. The latest surveys still reflect the current tariff environment contributing to a more cautious and subdued economic backdrop. Surveys from manufacturing and services firms this month showed a continued slowing in demand, though no severe contraction, as firms grapple with the challenges of navigating uncertainty, rising prices, and supply disruptions. US-based surveys for May showed a consistent theme across both manufacturing and services sectors – and that was the impact of tariffs on prices. From the S&P US Services PMI;
“Alongside sluggish economic growth, the survey is also signaling intensifying inflationary pressures. Rising costs in the service sector were again blamed widely on tariffs, which were in turn passed on to customers to result in the steepest rise in average prices charged since August 2022.” Source: S&P US Services PMI – May
The latest Fed Beige Book reflected a similar sentiment. There were more widespread reports of firms expecting prices to increase at a faster pace going forward and “more widespread reports of declining economic activity” at the end of May. All Districts reported elevated levels of economic and policy uncertainty, leading to a cautious approach to business and household decisions.
Finally, retail sales of motor vehicles for May showed a further unwind of front-loaded demand from Mar and Apr. Motor vehicle sales slowed again in May to 16.1m annualized – with the pullback only slowing to the 2024 average at this stage. But this will still drag on retail sales and spending reports in the short term. The current Atlanta Fed GDP Nowcast shows US growth for Q2 remains elevated at +3.8% – but due mostly to the favorable unwind of the growth in imports in Mar. The contribution from personal spending has continued to edge lower.
Central bank decisions last week also continued to reflect uncertainty over the impacts of tariff policy. The ECB cut rates as expected with inflation now judged to be settling around its 2% medium-term target. The decision reinforced the high degree of uncertainty surrounding the economic outlook due to trade and tariff policies, which is expected to lead to weaker growth for the remainder of the year. The BoC remained on hold, noting a softer, but not sharply weaker economy. The decision noted a “clear consensus to hold policy unchanged as we gain more information”.
Outlook for the week ahead; US CPI & PPI for May
The economic effects of tariffs are likely to be interconnected, influencing firms’ profitability through price pass-through decisions, inflation, consumer spending, and the labor market outlook. The scale of these effects is highly uncertain. Following last week’s insights into the US labor market and firm activity and sentiment, this week’s attention turns to US inflation data. With inflation reports remaining favorable over the past few months, the CPI & PPI reports for May are set to track any tariff-related effects.
It’s the blackout period ahead of the FOMC meeting next week, so there will be no Fed speeches this week.
Key factors & events to watch this week;
US CPI is expected to firm slightly in May;
- Headline CPI is expected to increase by +0.2% over the month in May, the same as in Apr.
- Headline inflation is expected to increase to +2.5% in May, up from +2.3% in Apr.
- Core CPI is expected to increase to +0.3% in May, up from +0.2% in Apr. Core inflation is expected to increase to +2.9% over the year in May, up from +2.8% in Apr.
US PPI is also expected to firm and will be important for the PCE view of inflation for the FOMC next week.
- Headline PPI is expected to increase by +0.2% in May after falling -0.5% in Apr. Headline PPI is expected to increase by +2.6% over the year in May, up from +2.4% in Apr.
- Core PPI is expected to increase by +0.3% in May, up from a -0.4% fall in Apr. Core PPI is expected to increase by +3% over the year in May, from +3.1% in Apr.
Chinese trade data for May will also provide further insight into tariff impacts on activity.
- Export growth over the year was expected to slow from +8.1% in Apr to +5% in May (actual was lower than expected at +4.8% – so Chinese export growth slowed notably in May).
- Imports were expected to fall slightly by -0.9% in May, from -0.2% in Apr. Actual imports fell by -3.4% in May – more than expected.
This week, the US Treasury will auction and/or settle approx. $456bn in ST Bills, Notes, and Bonds, raising approx. $14bn in new money.
QT this week: Approx $10.9bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $0.4bn in Notes and Bonds will mature on the Fed balance sheet and be redeemed.
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
MCP Market Update: June 9th, 2025 – Wedging into the highs
The Macro Outlook for w/c 2 June 2025
Key events this week; US Non-farm Payrolls, ISM & S&P PMI surveys, Fed Speeches, ECB & BoC Meetings
Recap from last week: US Growth Amid Tariff Distortions
Following our focus in recent weeks, we continue to examine an economic landscape heavily influenced by the evolving trade policy. The broader theme from last week and for this coming week is the health of the US economy – and the degree to which we are starting to see any broadening out of tariff effects. The latest FOMC minutes also offered insights into the Fed’s perspective on inflation and growth risks amid the tariff agenda. New data last week provided a further snapshot of US domestic demand, business activity, and inflation.
The tariff agenda remains in a state of flux. Some of President Trump’s tariffs were deemed illegal under ’emergency powers’, though a stay was granted, keeping them in place while the appeal is considered. This legal uncertainty implies a further protracted path of negotiations with trade partners. Compounding this, news of higher tariffs on steel and iron imports also emerged. These developments ensure that tariffs continue to be a significant source of uncertainty and unpredictability for the economic outlook.
Tariff-driven inflation and uncertainty were two of the key themes from the latest FOMC Minutes. However, the Minutes of the 6-7 May meeting were before the important 12 May announcement of the US-China reprieve agreeing to lower tariffs for 90 days. Based on that view of the tariff outlook, the Minutes highlighted concerns that tariffs could complicate the disinflationary process by leading to persistent inflation, market disruptions, and negative effects of elevated uncertainty on broader sentiment and the economic outlook. The FOMC acknowledged that the tariff announcements had increased concerns over the near-term outlooks for both inflation and growth. Committee participants agreed that the risks of higher inflation and higher unemployment had risen. With policy settings still seen as “moderately restrictive,” the Committee believed that it was well-positioned to wait for more clarity on the outlook for inflation and economic activity. Speeches since then have maintained this wait-and-see approach as the tariff and policy agenda continues to evolve.
While policymakers voiced concerns over the potential for higher tariff-led inflation, the latest PCE inflation data for Apr showed little impact from tariffs so far. To date, it’s been survey measures reflecting a concerning trend of more widespread increases in prices – but these surveys don’t show the magnitude of the price increases, nor the degree of pass-through. It’s still unclear how big the tariff impact will be on inflation. In Apr, both headline and core PCE inflation measures came in lower than expected. Headline PCE inflation slowed to +2.15% and core PCE inflation slowed to +2.5% over the year. Core services inflation was notably slower at +0.1% with a drag from portfolio management fees which is likely to rebound next month. However, a potential broadening of tariff effects into core goods was hinted at, with the monthly rate up to +0.5% led by furnishings and durable household equipment and recreational goods & vehicles. The trimmed mean alternative view of underlying inflation was unchanged at +2.5% over the year and the monthly rate remained at +0.2%, unchanged for the last six months. This reflects a steady pace of monthly underlying inflation, remaining on more of a sideways trajectory. This likely underscores the Fed’s concern about the starting point for inflation under the new tariff regime: where inflation is still elevated relative to the 2% target and has been above that target for five years now.
A key theme from the rest of the data last week centered on the health of the US domestic economy and specifically the US consumer. Beyond prices, the data offered insights into how the core US economy, particularly the consumer, is faring under these highly uncertain conditions and whether tariff effects are beginning to manifest more broadly in domestic demand. The data reflected a slowdown in consumer spending growth, but that spending remained resilient and supported by solid labor market and income conditions in Apr. The increase in saving (income surplus) seems aligned with the more dour sentiment among households through Q1.
The second estimate of US Q1 GDP was little changed with aggregate demand contracting slightly less by -0.08% in Q1. Underneath that headline, the key story was the downward revision to Q1 personal consumption growth, from +0.4% to +0.3%. Context is important and this slower growth follows considerably higher growth over the past three quarters, which averaged +0.86%, and occurred despite the significant weakening of consumer sentiment in Q1. Removing the distortions from net trade and inventories the Real Private Domestic Final Purchases (PDFP) measure of private domestic demand did slow to +0.5% in Q1 but remained at a still solid +2.8% over the year. While growth in personal consumption slowed, growth in private fixed investment accelerated, notably in non-residential equipment.
The Apr personal spending data pointed to resilient consumer spending. While real spending growth in Apr slowed to +0.1%, this was preceded by a substantial +0.7% increase in Mar. In other words, the higher spending levels from Mar were sustained into Apr – though the mix shifted, and this was despite the Mar spending likely reflecting some pull-forward of auto sales ahead of tariffs. The risk is that any pull-forward of demand due to tariffs may still reverse later as demand normalizes.
Importantly, spending was supported by another solid gain in personal income in Apr, rising +0.8% from +0.7% in Mar. While this was mostly due to a change in transfer payments, employee compensation growth slowed only slightly in Apr to +0.5% (from +0.55% in Mar), reflecting solid labor market conditions. Similarly, personal income excluding transfer payments increased by +0.4% in Apr – also equalling the average monthly increase of 2024 – and only slightly slower than the larger increase in Mar. The higher income growth and slower spending growth resulted in another increase in personal savings in Apr. This seems fairly consistent given the substantial weakening in consumer sentiment through Q1. Sentiment has stopped falling as tariff rhetoric has softened, but any rebound in the outlook sentiment has been modest so far.
The preliminary Apr goods trade balance was a key release last week, highlighting a sharp reversal in the drag from goods trade on growth. The goods trade deficit narrowed notably, almost halving after imports fell and export growth accelerated in nominal terms. This shift in trade dynamics, directly influenced by the evolving tariff landscape, had a notable effect on the latest iteration of the Atlanta Fed GDP nowcast for Q2 GDP growth. After all the data last week, the US growth run rate now sits at a more robust +3.8% in Q2. This figure was primarily driven higher by a substantially larger contribution from the narrowing goods trade deficit, more than offsetting a softening in the contribution from personal consumption expenditures and private domestic investment.
Outlook for the week ahead; US Non-farm Payrolls, ISM & S&P PMI Surveys, Fed Speeches, ECB & BoC Meetings
Our focus remains on tracking shifts in the US economy’s progress, mindful of the potential for higher inflation, slower growth, and distortions stemming from the evolving tariff policy. Building on the insights from last week, the spotlight turns to the US labor market data for May – crucial for gauging the consumer’s ongoing resilience. The ISM and S&P PMIs for May will further provide early insights into how private sector firms are responding to the shifts in the tariff outlook.
Key factors & events to watch this week;
US labor market – May
- US non-farm payroll growth is expected to slow to +130k in May, from +177k in Apr. While revisions will be important, so will the composition of payroll growth – to assess the degree to which tariff effects are potentially starting to broaden out among key industries.
- Despite slower payroll growth, the unemployment rate is expected to remain unchanged at 4.2% in May.
- Average weekly hours are expected to be unchanged at 34.3.
- The JOLTS survey for Apr is expected to show job openings remaining little changed at 7.1m.
- Initial claims remain on our radar with both initial jobless claims remaining elevated and continuing claims yet again reaching the 1.9m level.
- The Challenger Job Cut Announcement survey for May will provide some further insight into future planned layoffs by firms. Job cut announcements have been elevated through Q1 – suggesting a rise in layoffs on the horizon.
US ISM PMIs – May
- The US ISM surveys for manufacturing and services will provide an important gauge reflecting how firms are responding to shifts in the tariff landscape – through orders, inventories, the labor market, and prices.
US Fed speeches
- There will be a range of Fed speeches this week – with several speeches focusing on the Economic Outlook – including Governors Waller, Cook, and Kugler. This is usually an important topic, providing some insights into how Fed officials are seeing and characterizing the latest inflation, growth, and spending data.
- Fed Chair Powell will give opening remarks on Monday.
- The latest Fed Beige Book will be released, providing a summary of important anecdotes from Fed regional contacts on the economy.
Central Bank Meetings & Minutes
- The ECB will meet this week and is expected to cut its benchmark Deposit Facility Rate by 25bps.
- The BoC is also expected to cut its benchmark rate by 25bps.
- The minutes of the latest RBA meeting will be released, where the RBA cut rates for the second time in this cycle. We’ll be looking for details of the discussion regarding the size of the rate cut.
Euro area CPI – prelim for May is expected to show inflation moderating. Headline CPI is expected to slow to +2% in May from +2.2% in Apr. Core CPI is expected to slow to +2.4% in May from +2.7% in Apr.
Canada’s labour market is expected to deteriorate further in May, with the net employment change to decline by 15k after only a modest +7.4 increase in Apr. The unemployment rate is expected to edge higher to 7% from 6.9% in Apr.
Finally, the broader suite of global S&P PMIs for May will be released this week. The global composite output index slowed notably last month, as both services and manufacturing output growth momentum slowed.
This week, the US Treasury will auction and/or settle approx. $404bn in ST Bills, with a net paydown of $38bn.
QT this week: Approx $5.2bn 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
MCP Market Update: June 2nd, 2025 – Inter-market divergence
