Macro View: In our view we are at another cross roads for the US economy. The retooling of how the federal government operates (and potential fiscal consolidation) along with the heavy hand of tariffs will both take some time to adjust to which runs the risk of being highly disruptive in the short-term. Meanwhile, US labor statistics have long provided mixed messaging on the true health of the jobs market (with some clarity likely incoming post NFP). And if this is an economy in transition (with escalation risks as President Trump rolls out his policies) it might make sense to ignore prior data trends.
Fed View: As we discussed in our Fed recap (see link), the FOMC left rates unchanged at their January meeting, the first skip after 100 bps of easing in late 2024. Powell expressed that the Committee is in no hurry to cut again and will continue to be data dependent, saying rates are well-calibrated. However, this does not mean cutting later this year is off the table. Since publishing our 2025 outlook (see link), we updated our Fed view earlier in the month (see link) to only expect two cuts this year. In our view, “not in a hurry” means the Fed will skip at least two meetings in a row, including March. May and June are on the table for rate adjustments, as Powell said policy is still in restrictive territory. That will depend on the 3 things: The pace of further progress on inflation, will the jobs data show weakness (as we expect), and the impact of Trump policies.
US Politics: In his return, President Trump has signed a slew of executive orders and rescinded over 70 Biden-era policies. At the time of writing Trump imposed tariffs of 25% on Canadian and Mexican imports with a further 10% on China. Additionally, Trump signed initiatives that aimed to secure the border, freeze hiring for some federal jobs, and expand oil & nat-gas production.
Special Topic: Labor Demographics & Exploring Impact of Immigration: We explore the extent to which new immigration policies may affect the US labor market. Non-US citizens have increased their contribution to employment in many sectors recently, with the largest percentage gains in construction and accommodation/food services. The recent inflow of immigrant workers has likely helped absorb some slack in the labor market too, and if immigration flows were to slow due to new policies (or worse reverse), it could exacerbate pre-existing labor shortages and potentially place upward pressure on wages.
Markets: Long-term US rates have already been discounting the concerns over higher inflation (from import costs rising due to tariffs and/or less immigration) as well as supply concerns (via fiscal largesse). And the short-term rates market has reduced Fed cut expectations too. Equity and credit markets have ignored multiple risks. We feel the time has come for a major reset in market valuations.
