US Economy: Weekly Commentary – March 31, 2025.
US Market Review
Equities fell, led by microcaps. Treasury yields dropped, the US dollar weakened, and crude oil rose. Gold hit a new high, while Bitcoin dropped significantly.

Treasury yields decreased this week. The 30-year yield surpassing the 5-year yield by over 65 basis points, marking the widest gap since early 2022. Shorter-maturity Treasury yields were tempered by expectations of Federal Reserve interest rate cuts later this year, driven by signs of slowing US economic growth.

Equities ended the week in the red, with microcap stocks leading the downturn, falling more than 3.20%. The "Magnificent 7" also dropped over 2.60%. Among them, Tesla saw the largest decline with a nearly 35% drop YTD, while Alphabet and Nvidia each fell over 18.20% YTD. Most sectors closed lower, except for Consumer Staples, which rose slightly by just over 1%. Investors have been shifting focus to European equities, pulling funds out of the United States.

The US dollar weakened by 0.16% against the euro. Crude oil (WTI) gained 1.08%, supported by a 3.3-million-barrel drop in US crude oil inventories. President Trump’s threat to impose tariffs on countries importing Venezuelan crude has led to a slowdown in shipments from Venezuelan ports, further constraining global supply. Gold continued its rally, climbing 2.96% to reach a new all-time high, as investors sought safe havens amid growing concerns about the global trade war. Bitcoin fell by 4.20%.
US Market Views Synopsis
The U.S. economy grew 2.4% in Q4 2024, driven by consumer spending, but faces inflation, weak business investment, and rising deficits, challenging future growth.

The U.S. economy grew by 2.4% in Q4 2024, supported by strong consumer spending, but faced challenges from weak business investment, inflationary pressures, and rising deficits. Consumer spending increased by 4%, but business investment saw an 8.7% drop, and reduced business inventories slowed growth. Inflation remained persistent, with the PCE index surpassing the Federal Reserve's target, while tariffs from President Trump could exacerbate inflation and hinder investment. PMI data highlighted a strong services sector, but manufacturing contracted, and business confidence weakened. The housing market showed slight improvements, but affordability challenges and high inventory limited growth. Consumer sentiment dropped for the third consecutive month, with rising concerns about unemployment and inflation. As inflation pressures persist, the Federal Reserve may keep interest rates high, potentially slowing economic growth further. Analysts predict that these ongoing issues, coupled with political factors, could result in a challenging economic environment in the near future.
GDP
The U.S. economy grew 2.4% in Q4 2024, driven by consumer spending, but inflation pressures, weak business investment, and rising deficits pose future challenges.

The U.S. economy grew at an annualized rate of 2.4% in the fourth quarter of 2024, according to the latest revision by the Department of Commerce, surpassing the previous estimate of 2.3%, but slowing down from the 3.1% growth in the previous quarter. The growth was driven by a solid increase in consumer spending, which rose by 4%, while business investment fell sharply, with an 8.7% contraction in equipment investment. Additionally, a reduction in business inventories subtracted 0.84 percentage points from growth, and a key metric measuring the underlying strength of the economy — excluding exports, inventories, and government spending — showed a growth of 2.9%, slowing from 3.4% in the previous quarter.

Despite the upward revision, the economic outlook remains uncertain. Inflation showed signs of persistence, with the Personal Consumption Expenditures (PCE) price index rising by 2.4%, surpassing the Federal Reserve's target, while core inflation reached 2.6% (revised down from 2.7%). Furthermore, President Donald Trump's decision to impose tariffs on various imports, including a 25% tax on foreign cars, could increase inflationary pressures and hinder investment. With rising government spending and an expanding deficit, some analysts warn that the growth adjusted for deficit spending is the weakest since the 1930s, posing significant challenges for the economy in the coming months.

We expect an economic slowdown due to inflation pressures from tariffs, a weakened labour market from public sector layoffs, and the expulsion of immigrants from the U.S.
Inflation
Stagflation fears rise in the U.S. as inflation stays high, consumer spending weakens, and tariffs exacerbate price pressures, limiting the Fed’s ability to cut rates.

Stagflation fears in the U.S. are intensifying as hot inflation and weakening consumer spending are likely to be further exacerbated by President Trump's aggressive tariff policies and government spending cuts, which are expected to strain the economy and limit the Federal Reserve’s ability to reduce interest rates. February’s PCE inflation, the Fed's preferred measure, came in at 2.5%, in line with expectations, while core PCE inflation rose to 2.8%, surpassing forecasts. Additionally, January’s core PCE was revised upward to 2.7%, signaling persistent inflationary pressures. Recent data only deepens these concerns: the core PCE deflator came in hotter than expected at 0.4% MoM, while real personal spending showed signs of cooling, increasing just 0.1% MoM, with January’s contraction revised downward to -0.6%. These inflationary concerns are not just short-term but appear entrenched, partly driven by tariffs, which are continuing to push up costs, especially in goods and services where price increases have been particularly pronounced. With the Fed needing an average monthly inflation of just 0.17% to reach its 2% annual target, current trends suggest inflation will remain elevated, limiting the Fed’s ability to implement further rate cuts. From a growth perspective, these potential rate cuts are becoming increasingly crucial, as tariff-related fears of reduced spending power and job losses, compounded by ongoing global supply chain disruptions, have dampened consumer sentiment and spending. The cooling in personal consumption is now translating into a more cautious economic outlook. While Fed Chair Powell has downplayed such concerns, his stance may shift depending on evolving data, particularly as inflation remains stubbornly high and the economic slowdown deepens, making it more difficult for the Fed to balance inflation control with fostering economic growth.

We anticipate higher inflation in the coming months, which is likely to pressure the Federal Reserve to maintain elevated interest rates for an extended period.
Business Activity
U.S. PMI data highlights service sector growth, manufacturing contraction, and growing economic caution, with slower GDP growth and rising inflation, particularly in manufacturing.

The latest U.S. PMI data indicates a mixed economic picture, with robust growth in services and persistent weakness in manufacturing, showing little change from last year. The manufacturing PMI fell to 49.8, down from 52.7, signalling a contraction in the sector, while the services PMI increased to 54.3, up from 51.0, marking a 3-month high. The composite PMI reached 53.5, reflecting an overall uptick in business activity driven by services. Despite a rebound in the services sector, which accounts for a larger portion of the U.S. economy, manufacturing output declined for the first time this year, largely due to a slowdown in new orders and a drop in output attributed to the uncertainty surrounding tariffs. The data also pointed to weakening confidence in future business conditions, with expectations for the year ahead at their second-lowest point since October 2022. Survey results suggest the U.S. economy is growing at an annualized rate of 1.9% in March, which is a deceleration compared to the previous quarter. The services sector's performance was the primary driver of this growth, with a significant recovery in new business inflows, improved customer demand, and more favourable weather conditions. However, exports in services continued to decline, marking the third consecutive month of contraction. Employment growth was minimal, with many companies expressing concerns over the uncertain outlook, rising costs, and sluggish demand. Manufacturing also faced rising input prices, with inflation reaching a near two-year high, largely attributed to tariff policies, though competition limited the ability to pass on these higher costs to selling prices. The overall sentiment remained cautious, reflecting concerns over federal spending cuts, tariffs, and the broader impact of new policies from the administration, which dampened business confidence, particularly in the service sector.

We expect continued growth in services, with a slow manufacturing recovery, while inflationary pressures due to tariffs and cautious business sentiment persist.
Housing Sector
Pending and new home sales rose in February, but affordability challenges, high inventory, and rate lock-in effects continue to constrain market activity despite seasonal and regional improvements.

Pending home sales surpassed expectations in February, rising 2.0% MoM versus the projected 0.9%, though they remain 3.6% lower YoY, reflecting a slight improvement from the previous month's 4.6% decline. As a leading indicator based on contract signings, pending sales offer insight into future home purchases, suggesting a sluggish start to the traditionally busy spring season. Purchase mortgage applications ticked up slightly in March but remain well below historical norms, underscoring persistent affordability challenges. While pending sales declined in the Northeast and West, the Midwest and South saw gains, with the South particularly benefiting from increased new construction that has helped boost supply and ease affordability pressures. Additionally, rising inventory, more price reductions, and longer listing times indicate potential relief for buyers, even as mortgage rates remain steady. Looking ahead, a seasonal uptick in home-buying activity is anticipated, though affordability constraints and the rate lock-in effect continue to weigh on market dynamics compared to pre-pandemic trends.

New home sales rose 1.8% MoM in February, falling short of the expected 3.5% increase but improving from January’s revised 6.9% decline. While sales in the South and Midwest rebounded from weather-related disruptions, overall activity remains flat over the past two years, even as pending and existing home sales trend lower. The median sale price declined to $414,500, with significant downward revisions for prior months, while supply rose to 500,000 units—the highest level since 2007—bringing the monthly inventory to 8.9 months from 9. Although recent mortgage rate declines offer a short-term boost for homebuilders, elevated inventory and persistent affordability challenges signal that residential investment will provide limited support to the broader economy.

We expect a modest seasonal uptick in home-buying activity, but affordability constraints, high inventory, and mortgage rate pressures will continue to limit overall market growth and recovery.
Consumer Sentiment
Consumer sentiment fell for the third month, with rising inflation and unemployment expectations. Political polarization diminished as concerns about economic challenges were widespread across groups.

Consumer sentiment continued its downward trend, declining for the third consecutive month with a significant 12% drop from February. The expectations index saw a sharp 18% decrease, marking a more than 30% loss since November 2024. This month's decline reflects a broad consensus across all demographic and political groups, with Republicans joining independents and Democrats in expressing worsening outlooks for their personal finances, business conditions, unemployment, and inflation. Consumers remain concerned about potential economic challenges as policy developments unfold. Notably, two-thirds of consumers now expect unemployment to rise in the coming year, the highest level since 2009, highlighting a key vulnerability as strong labour markets and incomes have been pivotal in supporting consumer spending. Additionally, year-ahead inflation expectations rose from 4.3% to 5.0%, the highest since November 2022, marking three consecutive months of significant increases. This rise was seen across all political affiliations. Long-term inflation expectations also surged from 3.5% in February to 4.1% in March, driven largely by independents and, to a lesser extent, Republicans. Overall, the trends in these metrics reflect the views of independents rather than being heavily influenced by polarization between the two major political parties.

These results align with our previous comments. Tariffs will likely increase inflation, and the labour market could weaken further in the near future.
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