by Kim | Mar 17, 2025
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
by Kim | Mar 10, 2025
Key events this week – US CPI and PPI Feb, Bank of Canada meeting
Recap from last week: Data remains solid, but rising uncertainty clouds the outlook.
While U.S. data remained solid last week, rising uncertainty, fueled by erratic tariff news and spending cuts, is clouding the economic outlook and souring sentiment.
At the end of the week, US Fed Chair Powell’s speech aimed to look through the noise of the news flow. Most important was Chair Powell’s signaling on the path of rates given concerns over rising inflation pressure. He reiterated that if inflation does not continue to move sustainably toward the 2% target, i.e. if it starts to firm, then the likely policy response would be to maintain the current policy restraint for longer. Rate hikes were not mentioned at this stage. Alternatively, rate cuts would be appropriate if labor market conditions weaken, or if inflation falls faster than expected. He reinforced that conditions were still such that the Fed doesn’t need to be in a hurry to adjust policy and can wait for greater clarity to understand the “net effect” of policy changes.
Fed Governor Waller’s speech a day earlier also had a ‘wait and see’ approach regarding the impacts of tariffs and other policy measures. He pushed back on any easing at the next meeting, noting that he wanted to see Feb inflation data. He felt cuts would come later in the year.
But Waller did acknowledge recent data that points to rising weakness, and he said he’s waiting to see if it translates into broader-based government data. Source: Reuters 6 Mar 2025
For now, the question is whether some of this “rising weakness” will translate into “hard data”.
Given all the news, labor market data was surprisingly solid for Feb. While there were a few weak points, conditions could still be seen within the context of a gradually cooling labor market. Growth in non-farm payrolls came in around expectations at +151k (expecting +160k) versus +125k in the prior month (revised lower from +143k). The 6-month average increased to +191k jobs. The average workweek remained near its recent low of 34.1 hours, however, growth in aggregate hours did rebound in Feb. The average hourly earnings were lower than expected in Feb at +4% over the year, as Jan was revised lower to +3.9%. One weak spot was the employment-to-population ratio which continued to drift lower – and this will be something to watch. While the unemployment rate did edge higher to 4.1%, it remains within the recent range.
It’s worth noting that, the cut-off date for the labor market data was early Feb – and as such may not fully reflect the ramp-up in cuts to government spending and headcounts through the month. The Challenger report for Feb provided a darker view of the outlook for the labor market with a notable jump in layoff announcements to 172k in Feb from 49k in Jan. The DOGE cuts accounted for the single largest reason for layoff announcements (62k). However, there were large increases in layoff announcements across a broad range of industries, attributable to market/economic conditions, bankruptcy, restructuring, and closing – with these four reasons alone accounting for 92k of the job cut announcements in Feb.
Other survey data, such as the PMIs did not highlight weakness in employment in Feb. The Beige Book anecdotes also reflected more stable employment conditions in Feb compared to early Jan. For now, data is likely consistent with the Fed’s characterization of the labor market as “remaining solid”, though risks exist.
The same survey data provided further anecdotal evidence that tariff threats are coinciding with more widespread pricing pressures. A key theme in both the ISM and S&P PMI surveys in Feb was that input cost pressures increased. Output prices also increased in Feb, though the Beige Book noted that some firms reported difficulty in passing on higher input costs. This week, the focus will be on whether these rising inflation pressures will be reflected in CPI and PPI data for Feb.
From a growth and momentum perspective, the US PMIs for Feb reflected manufacturing and services activity/output moderating, especially manufacturing orders. Employment indicators suggested little change in conditions from the prior month. Across most surveys, the overriding theme was tariffs and the uncertainty surrounding them.
The Atlanta Fed GDP nowcast model still shows the US GDP run rate contracting at a notable pace so far in Q1. However, the release of the more detailed international trade report revealed that a large contributor to the increase in imports was non-monetary gold (i.e. not reflecting changes in economic activity). Analysis by the Atlanta Fed suggests that adjusting for the gold imports, the US Q1 growth run rate likely improved (as a result of the data released last week) to +0.4% annualized.
Outside of the US, the ECB cut its deposit facility rate by 25bps to 2.50% – now just above the upper bound of what it might consider the ‘neutral range’. Inflation forecasts were revised slightly higher on rising energy prices while risks to growth remain tilted to the downside. New fiscal priorities were likely to support the growth outlook, though details of spending would be important. For now, disinflation remains on track, policy is becoming meaningfully less restrictive, and uncertainty is elevated.
Some people have used the adjective “phenomenal” uncertainty, and we debated as to whether it was high, high and rising, but suffice to say that it is all over – so we have risks all over, uncertainty all over. Source: ECB Press Conference Q&A, 6 Mar 2025
From China’s NPC, “Premier Li Qiang declared on Wednesday that “vigorously boosting consumption” was the government’s top priority in 2025 as it strives to hit an ambitious growth target of “about 5%,” the same as the past two years” (source: Bloomberg, 6 Mar 2025). Measures were announced to restructure and support these policy goals – though did not include any direct stimulus. The latest data still pointed to tepid economic conditions. Annual CPI and PPI for Feb returned to deflation. Trade data also pointed to weaker than expected demand with export growth slowing to +2.3% over the year from +11% in Dec and imports declining by -8% in Jan/Feb from +1% in Dec.
Outlook for the week ahead; US CPI and PPI, BoC monetary policy meeting, and tariff headline risk
US economic outlook concerns stem largely from worsening survey data, especially rising inflation pressures. That’s why the US CPI and PPI data for Feb will be important this week – to see whether concerns begin to translate into hard data. Like the labor market data, it may still be too early to see a widespread impact.
Key factors to watch this week;
US CPI and PPI for Feb. While CPI is not the Fed’s preferred inflation gauge, both the CPI and PPI will provide a guide for the PCE inflation result for Feb. This will be an important input for the Fed meeting next week.
- Headline CPI is expected to ease to +2.9% over the year in Feb, from +3% in Jan. Over the month, CPI is expected to slow to +0.3% in Feb, down from +0.5% in Jan.
- Core CPI is expected to slow to +3.2% over the year in Feb, from +3.3% in Jan. Over the month, core CPI is expected to slow to +0.3% in Feb from +0.4% in Jan.
- Headline PPI is expected to slow to +3.3% in Feb, from +3.5% in Jan. The monthly PPI rate is expected to slow to +0.3% over the month in Feb, from +0.4% in Jan.
- Core PPI is expected to remain unchanged at +3.6% in Feb, versus +3.6% in Jan. The monthly core PPI rate is also expected to be unchanged at +0.3% over the month in Feb, versus +0.3% in Jan.
The US JOLTS data for Jan lags the broader labor market releases this month. Job openings are expected to increase to 7.7m in Jan, up from 7.6m in Dec. Potential weakness from recent DOGE cuts are not expected to show up in the JOLTS data for Jan.
It’s the blackout week for Fed speeches ahead of the FOMC meeting next week.
The Bank of Canada will meet this week and is expected to cut rates again. Guidance was suspended at the last meeting as the threat of tariffs and a trade war created notable uncertainty over the growth outlook. News on this front has been less than positive for Canada, with both the US and China imposing tariffs on Canadian exports, with more tariff news expected. The Canadian labour market report last week was also mixed. The unemployment rate remained unchanged at 6.6% but employment growth disappointed at only +1k net for the month.
Further news on tariffs for China, Canada, and Mexico is expected this week – and headline risk remains elevated. This week, steel and aluminum tariffs are expected to be implemented, while the Trump administration continues to work towards the 2 Apr deadline for a broader tariff announcement.
This week, the US Treasury will auction and/or settle approx. $424bn in ST Bills, with a net paydown of -$61bn. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond – all to settle next week.
QT this week: Approx $2.9bn 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
by Kim | Mar 3, 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
by Kim | Feb 24, 2025
Key events this week – US PCE inflation, durable goods orders, Q4 GDP, and ECB minutes
Recap from last week: Navigating the push and pull of US policy uncertainty.
The Jan FOMC minutes revealed several key themes, but prominent was the underlying uncertainty surrounding US policy and its potential impact on the inflation outlook. The Committee had kept rates unchanged at the last meeting after cutting 100bps at the prior three meetings. The Committee noted that it was “well positioned” to take time to assess the evolving outlook for economic activity, the labor market, and inflation. Labor market conditions and economic activity were seen mostly in a positive light. The main theme repeated in various ways throughout the minutes was that inflation remains somewhat elevated, with upside risks to the inflation outlook. Upside risks stemmed from 1) core PCE ending 2024 at a higher than projected level despite some better monthly results in Nov and Dec and, 2) other factors;
However, other factors were cited as having the potential to hinder the disinflation process, including the effects of potential changes in trade and immigration policy as well as strong consumer demand. Source: FOMC Minutes 28-29 Jan 2025
There was also some difference in views over the degree of restrictiveness of current policy settings. Finally, there was a discussion about how the resolution of the debt ceiling could impact reserves and that it could be appropriate to pause quantitative tightening (QT).
The effect of the push and pull from the evolving US policy outlook also emerged in last week’s data. The most notable impact was in the S&P Prelim PMIs for Feb with services activity/output slipping markedly into a slight contraction for the first time in several years. The manufacturing output index reflected continued expectations of growth. The overall US composite output index slumped to a near-stall pace of 50.4 in Feb;
New order growth also weakened sharply and business expectations for the year ahead slumped amid growing concerns and uncertainty related to federal government policies. The upturn in manufacturing output was also in part linked to the front-running of tariffs, hinting at merely a temporary boost. Source: S&P US Flash PMI – Feb 2025
In the latest S&P PMI survey, optimism in the outlook fell to the lowest level in over two years due to increased uncertainty for business from spending cuts and tariffs, concerns over higher prices, and “broader geopolitical developments”. It will be important to see how this survey result aligns with the upcoming ISM surveys for Feb and also how it translates into ‘hard data’.
The Michigan consumer sentiment survey also recorded a marked fall in sentiment in Feb. The falls in sentiment differed across party affiliations – unchanged for Republicans with falls recorded among Democrats and Independents. Again, it will be important to see how this aligns with the Conference Board consumer sentiment results this week.
Aligning with the prelim manufacturing PMI, the US regional manufacturing surveys continued to indicate positive conditions. Housing data reflected ongoing lackluster conditions. New home builder sentiment fell notably across all regions. Growth in the issue of new permits remained flat. New housing starts fell back in Jan after a stronger Dec, with the largest falls recorded in the South (likely weather-related). Existing home sales also fell notably in Jan, across all regions. For now, news of wide-ranging government job cuts has yet to broadly impact initial jobless claims, though claims in the DC area have ticked up. Initial jobless claims remain at the 12-week average.
The updated Atlanta Fed GDP nowcast for US Q1 growth was unchanged at +2.3% last week (based only on the addition of housing starts data for Jan). However, the path of the FFR did evolve last week – with conditional probabilities now reflecting two possible cuts this year (at the time of writing; Jun and Dec cuts) (Source: CME Fedwatch).
The RBA reduced the cash rate for the first time in this cycle, citing faster-than-expected progress on underlying inflation. However, there is a high degree of caution on prospects for further easing and more detailed guidance was suspended. The Board noted that upside and downside risks to inflation remain, and that policy needs to remain restrictive to ensure that disinflation progress does not stall. The Jan labour market results remained strong with above-average employment growth. The unemployment rate increased slightly due to the increase in participation to another new all-time high.
The RBNZ cut rates by 50bps as expected. The Board noted that while inflation remained within the target band, ‘significant spare capacity in the economy’ indicated that a further reduction in the OCR was appropriate.
More broadly, the S&P prelim PMIs for Feb continued to reflect shifting momentum. The prelim PMI release covers the US, UK, Germany, France, Japan, the broader Eurozone, and Aus. The prelim manufacturing PMI’s improved across most countries, except in the UK. Despite the improvement, manufacturing activity remained in contraction, albeit to a lesser extent, across most countries except in the US and Aus. The recent stronger momentum across services slowed in Feb – led by marked falls in the US, France, and Germany to a lesser extent.
Outlook for the week ahead; US PCE inflation, durable goods orders, and Q4 GDP, and ECB minutes.
The focus this week shifts to assessing progress on US PCE inflation and growth data and what they mean for the path of US rates.
Key factors to watch this week;
US annual PCE inflation is expected to ease in Jan.
- Using the latest Cleveland Fed PCE nowcast for PCE inflation, headline PCE inflation is expected to increase over the month to +0.38% in Jan from +0.26% in Dec. While lower than the same month a year ago (+0.42%), inflation at this monthly pace is still not consistent with the 2% target. The annual PCE inflation rate is expected to slow to +2.51% in Jan, from +2.55% in Dec.
- Core PCE inflation is expected to increase over the month to +0.37% in Jan from +0.16% in Dec. This would still be slower than the same month a year ago (which was +0.5% in Jan 2024). Annual core PCE inflation is expected to ease to +2.66% in Jan, from +2.8% in Dec.
- The FOMC projections in Dec 2024 showed core PCE slowing to +2.5% by the end of 2025.
- Of concern for the Fed has been core PCE inflation stalling at +2.8% for the last three months of 2024, having slowed to a low of +2.63% in Jun 2024.
Central banks;
- ECB minutes of the latest meeting will be released this week.
- US Fed speeches will be limited this week. Vice Chair for Supervision Barr will give several speeches on financial stability and supervision. Governor Bowman will give a speech on community banking. See the calendar for other speeches.
US data releases this week will primarily focus on production, spending, and income growth for Jan.
- The second estimate for US GDP in Q4 is expected to be unchanged at +2.3% annualized.
- US durable goods orders are expected to increase by +2% in Jan, up from -2.2% in Dec.
- Personal income growth is expected to slow to +0.3% in Jan from +0.4% in Dec.
- Personal spending growth is expected to slow to +0.2% in Jan from +0.7% in Dec.
- New home sales are expected to slow to a 0.677m annualized pace in Jan, from 0.698m in Dec. Pending home sales are expected to fall by -1.3% in Jan after a -5.5% fall in Dec.
Data outside of the US will focus on inflation and growth;
- The final Eurozone CPI for Jan is expected to confirm annual headline inflation at +2.5% and annual core inflation at +2.7%. Euro area country-level prelim CPI’s for Feb will begin to be released this week also. There will be several Euro-area GDP reports to be finalized for Q4; both Germany and France’s results are expected to confirm a contraction in GDP in Q4 of -0.2% and -0.1% respectively. German election results will likely stay in focus through the week, along with broader European geopolitical events.
- The Aus monthly CPI series (different from the comprehensive quarterly report) is expected to show headline inflation unchanged at +2.5% in Jan.
- Tokyo CPI will provide a preview of broader Japanese inflation for Feb. Tokyo CPI ex-fresh food is expected to slow to +2.3% over the year, from +2.5% in Jan. Last week Japanese national core CPI ex-fresh food came in higher than expected over the year, firming to +3.2% in Jan from +3% in Dec.
This week, the US Treasury will auction and/or settle approx. $680bn in ST Bills, Notes, FRNs, TIPS, and Bonds raising approx. $50bn in new money.
QT this week: Approx $35bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $10bn in Notes and Bonds will mature on the Fed balance sheet and will be redeemed/roll off the 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
by Kim | Feb 17, 2025
Key events this week – FOMC minutes, RBA & RBNZ meetings, CPI; Japan, UK, & Canada, Prelim S&P PMIs Feb
Recap from last week: US CPI firms, but PPI offers hope for softer core PCE inflation.
The US CPI and PPI releases for Jan offer key insights into the likely trajectory of the Fed’s preferred PCE inflation measure, due out on 28 Feb. While there wasn’t much to like about the firmer CPI results, the picture of US PCE inflation in Jan became a little more constructive after the PPI report.
The headline and core CPI results for Jan all came in higher than expected across both monthly and annual timeframes. Annual headline CPI increased to +3% while core CPI increased to +3.3% in Jan, both higher than in Dec. Monthly headline and core inflation accelerated to +0.5% in Jan, on par with the high readings from a year ago, adding further weight to the concern that progress on disinflation may have stalled. One positive from the report was that annual shelter inflation continued to slow. The PPI results for Jan were also higher than expected with headline PPI increasing to +3.5% over the year (expecting +3.1%). PPI inflation accelerated in the latter half of 2024. While not as high as in 2021/22, many PPI measures are now higher than they were a year ago.
Importantly, the increase in the individual PPI components that feed into the Fed’s preferred PCE inflation measure was more moderate in Jan. Together with the CPI result, suggests that the Fed-preferred annual core PCE is likely to decelerate in Jan. The FOMC is looking for further progress on annual core PCE inflation before it will continue cutting rates. Progress on core PCE inflation had mostly stalled through 2024, slowing to +2.6% through the middle of the year, then remaining at +2.8% for the last three months. Using the Cleveland Fed CPI nowcast for core PCE in Jan of +0.37%, and assuming no revisions, annual core PCE would slow to +2.66% in Jan. While this represents some progress, a monthly reading on core inflation of +0.37% would be elevated for the Fed, especially after more benign readings in Nov and Dec. The details of the report will be important.
During his testimony last week, US Fed Chair Powell noted that the Fed still has more work to do, and remains in no rush to lower rates.
“Last year, inflation was 2.6% — so great progress — but we’re not quite there yet,” Source: Bloomberg, 13 Feb 2025
The FOMC also wants to understand and assess the potential impact of new policy measures on inflation and the economy. The inflation outlook is still clouded by some uncertainty over the form of tariffs and other policy measures.
The US GDP growth run rate has moderated so far in Q1. The Atlanta Fed GDP nowcast for Q1 growth slowed to +2.3% at the end of last week. The slowdown from the prior week was mostly due to the sharper-than-expected fall in US retail sales of -0.9% for Jan, led by notable falls in motor vehicles and non-store sales. For now, the fall in Jan retail sales follows stronger retail sales growth in the back half of 2024. US industrial production growth slowed in Jan as manufacturing and mining output declined, and was partially offset by a notable increase in the output of utilities, due in part to cooler weather.
The prelim Q4 GDP growth for the Euro area came in slightly better than expected at +0.1% over the quarter (expecting 0%). This was still a step down from the somewhat more moderate pace of growth in Q3 of +0.4%.
UK GDP growth for Q4 was also better than expected at +0.1% over the quarter (expecting a fall of -0.1%) after no growth in Q3. The detail painted a less optimistic picture as household expenditure growth stalled, while business investment and net trade declined. This was offset by a positive contribution from the change in inventories and growth in government expenditure.
Outlook for the week ahead; FOMC minutes, RBA & RBNZ meetings, CPI; Japan, UK, & Canada, Prelim S&P PMIs Feb
This week, the focus shifts back to central bank decisions and key data. In the US, housing data for Jan will feed into a further update on the trajectory of growth so far in Q1. The prelim S&P PMIs for key developed markets in Feb will also provide a broader view of growth momentum and private sector sentiment through to the middle of Q1.
Key factors to watch this week;
The RBA and RBNZ will meet for the first time this year. The minutes of the Jan FOMC meeting will be released.
- The RBA is expected to cut rates for the first time in this cycle from 4.35% to 4.1%. The latest Q4 CPI report was positive for the RBA, with core CPI slowing further towards the top of the target range. At the last meeting, there had been a notable shift in the RBA outlook on inflation, with the Board “gaining confidence that inflationary pressures are declining”. So far, the labour market has remained solid, retaining most of the pandemic gains in terms of higher employment, lower unemployment, and higher participation. Given the strength in labour market conditions, the guidance provided by the Board will be important for the outlook on the path to further rate cuts. The Aus labour market report for Jan will also be released this week.
- The RBNZ is expected to cut rates by 50bps at its meeting this week. While inflation remained in the RBNZ target range for the second quarter in a row in Q4, growth and labour market conditions continued to deteriorate. GDP in Q3 contracted by -1% over the quarter (including revisions) while the unemployment rate increased to 5.1% in Q4, from 4.8% in Q3.
- The minutes of the FOMC meeting on 29 Jan will be released.
Central bank speeches;
- US Fed; Several speeches are worth watching this week, most notably Governor Waller’s address on the US economic outlook. Others include Governor Bowman (including brief remarks on the economy), Governor Kugler (navigating inflation), and Fed Vice Chair Jefferson (Household balance sheets).
US data releases this week will primarily focus on housing, but will also include the first regional manufacturing surveys for Feb. The housing starts data will feed into another update on the pace of GDP growth through Q1 so far.
- US new housing permits are expected to ease slightly in Jan to a 1.46m annualized pace from 1.48m in Dec. New housing starts are expected to slow to a 1.39m annualized pace in Jan from 1.5m in Dec. Existing home sales are expected to ease to 4.13m units annualized in Jan.
CPI data for Japan, the UK, and Canada will provide important input for these central banks ahead of the next round of meetings in Mar.
- The National CPI in Japan is expected to remain firm in Jan. The BoJ preferred measure of core CPI ex fresh food is expected to increase in Jan to +3.1% over the year from +3% in Dec. The BoJ increased rates at the last meeting, citing progress on inflation and positive developments in wage growth. Recent speeches continue to hint at further hikes as long as inflation and growth evolve according to the outlook, though the prospect of tariffs remains a key uncertainty. GDP in Q4 came in higher than expected at +0.7% over the quarter, or a +2.8% annualized rate (expecting +1%).
- UK inflation and labour market data this week will provide an update for the BoE as it balances firming inflation with a slow growth backdrop. Headline CPI is expected to increase to +2.8% in Jan, up from +2.5% in Dec. Core CPI is expected to increase to +3.7% from +3.2% in Dec. At its last meeting, the BoE noted that headline inflation was expected to move up through the first half due to higher energy prices while underlying inflation was expected to wane. The Dec (rolling 3mth) UK labour market report will also be released this week, and the unemployment rate is expected to increase to 4.5%, up from 4.4% in Nov.
- Canadian CPI for Jan will be released this week. The monthly decline of -0.4% in Dec was partially the result of a temporary break in the GST. This is also expected to be reflected in stronger retail sales in Dec. Annual inflation is expected to be little changed from +1.8% in Dec, with monthly inflation remaining flat at 0%. The BoC core measures are also expected to be little changed with the trimmed mean remaining at +2.5%. The BoC core measures averaged +2.3% in Dec.
Finally, the S&P prelim PMIs for the G4 plus Aus will be released later this week.
This week, the US Treasury will auction and/or settle approx. $640bn in ST Bills, Notes, and Bonds raising approx. $18bn in new money.
QT this week: Approx $50bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $15bn in Notes and Bonds will mature on the Fed balance sheet and will be redeemed/roll off the 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
