Economic Updates for March 2025

Atlanta FED GDPNow estimate for Q1 2025 has lost a lot of altitude. It is reporting a negative GDP number primarily due to increase in imports in January. Fearing tariffs, companies have been stockpiling inventories of imported goods by front running the news.

Since the elections, USD has been consistently trending higher. With the tariff talks heating up, other currencies are seen weakening compared to the dollar in spite of higher inflation expectations. However, this trend is reversing after the tariffs were announced.
The new government is working on its policy framework that may have a significant impact on USD. The proposed Mar-a-Lago Accord is intended to push USD lower and make exports favorable and imports less favorable among other things. It is possible we are seeing early signs of this taking shape.

Commodity prices have been range bound for the last few years.

Gold continues to perform very well as the USD may see higher volatility with the shake up in global trade.

BitCoin continues to behave like a risk asset such as tech stocks. Recently, there has been some optimism with the talks of a sovereign bitcoin reserve.

The core CPI reading is likely to trend lower as the shelter component fades out. The overall CPI reading for the month of January 2025 was higher by 0.7%.

PPI is projected to increase by 0.4% for January 2025.

This is the headline inflation number that everyone talks about. For January 2025 we are at 3%. Historically, inflation is known to bounce back a few times before it finally subsides. Over the last 4 months, the inflation readings are steadily trending upwards. Although energy prices have been steady and shelter prices have come down, the cost on food has gone higher along with transportation costs. Tariffs may be an additional temporary headwind.

CPI Components Last Month Source BLS.gov Consumer Price Index

CPI Components This Month
The contributors to the inflation have been mainly food and transportation. (Please note that the y-axis in both the graphs have different scales).

This survey data shows that inflation one year from now is expected to be 3.3%.

University of Michigan's consumer sentiment has turned softer with the new year and is at a year low of 64.7 for February.

The AAII sentiment has been turning bearish over the last few weeks.

After almost a year of contraction, Manufacturing PMI has turned positive and is at 50.3 this month!

ISM non-manufacturing number have been fluctuating widely. For Jan 2025, we are at 53.5.

Industrial Production has remained positive through the last year and is showing an uptick in activity.

Retail Sales slowed down this month after a good run of positive performance over the past few months.

Non-farm payrolls remain robust indicating economy is still adding jobs. This month the jobs number came in at 151k jobs. There is loss of 10k government jobs this month and we may see this increasing in the coming months due to DOGE.

Total Vehicle sales came in around the average number over the past few months.

New home sales have been moderately trending higher even with high mortgage rates.

The mortgage rates have followed the 10-year Treasury yield lower over the last couple of weeks.

The unemployment rate has remained low. This indicator is a lagging indicator. We do expect to see this number creep up if recession becomes imminent. This month, it is at 4.1%.

This chart will be the first indicator of a telltale sign that unemployment is increasing. As you see the continuing jobless claims number rise, it implies the people who lost their jobs are not going back to labor force fast enough and the unemployment rate is starting to creep higher. Over the last couple of weeks, it has remained roughly flat.

The yield curve has un-inverted - 10 year constant maturity minus 2 year constant maturity is about 0.33%.

Yield curve - Then

Yield curve - Now
The yield curve is certainly reverted back to normal. Over the last few weeks, the long end of the rates have edged lower.

Technology and consumer discretionary - the stalwarts of the momentum trade - have lost steam. The sharp rotation trade into cyclicals and interest rate sensitive sectors away from technology is very evident. We hope the market continues to broaden in the coming months. Additionally, we are seeing international developed markets getting some love after many, many years.

If the economy were to enter a recession, it is likely that some of the companies will struggle to keep up with their debt payments causing their credit spread to widen. This indicator shows how the credit spreads have been behaving well so far even in the face of the Yen carry trade unwind.

The spread is 2.99% currently and it is starting to widen from the tightest levels we have seen recently.

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets.

The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be around $280 which translates to a price to earnings ratio of 20.7 at the current S&P 500 price level. This is above the 5 year and the 10 year averages. The market still remains pricey.

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