A softer growth outlook has dominated signs of renewed inflationary pressures this week
- GDP revisions for Q4 lent marginally dovish as domestic demand contributions were trimmed a touch, but they were still robust with Powell’s preferred measure of final sales to private domestic purchasers rising 3.0% annualized (3.2% in Q4 advance) after a particularly strong 3.4% in Q3, and 3.0% Y/Y.
- Consumption did however get off to an even weaker start to 2025 than previously thought after a disappointing retail sales report mid-month, with real spending slipping -0.5% M/M vs -0.1% expected.
- It built on disappointing Conference Board consumer confidence from earlier in the week, with the largest monthly decline since Aug 2021 for its 4th-worst monthly reading since the start of 2021.
- Trade data also need special mention this week, with an enormous trade deficit far exceeding analyst expectations as imports surged in January in signs of tariff front-running.
- This trade-related GDP drag, whilst presumably temporary, helped see the Atlanta Fed’s GDPNow tracker slump to -1.5% annualized from +2.3% annualized in its previous Feb 19 update.
- Core PCE inflation meanwhile appears to be stabilizing a little higher than previously expected in more timely run rates, with the six-month accelerating to 2.6% annualized from an upward revised 2.4% (previously seen at 2.3%).
- Manufacturing surveys meanwhile point to a rapid increase in prices paid in February amidst tariff front-running, with perhaps most notably the MNI Chicago PMI seeing its largest monthly increase since July 1957 to leave it at its highest since Aug 2022.
- The softer growth outlook has dominated signs of renewed inflationary pressures this week: Fed Funds futures have a next 25bp Fed cut now fully priced for June, and over the week have added nearly an entire 25bp cut over 2025 with a cumulative 70bp of cuts vs the 50bp implied by the median FOMC dot in Dec.
- It’s a stacked week ahead, including the next major tariff deadline, payrolls, ISM services and Powell et al. Data and tariff deliberations should still set the tone, but at this juncture we wouldn’t be surprised to see a continued call for patience in rate cut expectations considering dovish repricing seen over the past week.
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