Context
As expected, last week was an interesting one, not only for economic developments but also for how politics and geopolitics are impacting economic policy. Amidst it all, markets continued to distinguish between sovereign developments and corporate valuations. Traditional correlations remained under stress, with both “risk-on” and “risk-off” assets seeing further price gains.
Having lost the first attempt to keep Governor Lisa Cook away from this week’s Federal Reserve policy meeting, the Trump Administration appealed the decision, asking the courts to rule before the start of the FOMC meeting on Tuesday. Incoming Governor Stephen Miran (currently CEA Chair) is expected to attend the FOMC following his anticipated Congressional approval on Monday. Meanwhile, the Supreme Court is expected to issue a ruling in the coming weeks on the Administration’s appeal of a lower court decision that undermines part of the tariffs introduced this year.
Adding to the Administration’s discomfort with the BLS, the Bureau revised down its job creation for the year ending in March to less than half of what it had reported earlier. This larger-than-expected revision is contributing to a change in the economic understanding of the U.S. economy, raising stronger concerns that the Fed’s policy has fallen behind. It also provides insights into what was a significant difference last year between how the labor market was said to be performing and how people felt, as reported by polls and surveys.
With the CPI inflation data in line with consensus forecasts and the PPI well softer than expected, markets were influenced by multiplying signals of developing labor market weakness. This included growing job insecurity, as measured by the UMich survey, which drove yields lower, with the 10-year dipping below 4% on a couple of occasions. This did not, however, dent the enthusiasm of stock market investors, as both the S&P and NASDAQ recorded new record highs—as did gold, traditionally a “risk-off” asset.
The monthly budgetary numbers confirmed that tariff receipts have become a major source of revenue. With a record monthly collection of $29.5 billion, the year-to-date number of $165 billion is now running $95 billion ahead of the corresponding period last year. All this comes as exporters and domestic importing companies face constraints on significantly passing on the higher costs to consumers.
The ECB left rates unchanged, keeping a close eye on France where yet another government resignation over fiscal issues widened sovereign bond spreads to Italian levels and triggered a Fitch credit rating downgrade. Additionally, the spread on some French corporates, including Airbus and L’Oreal, is now trading inside that of the sovereign.
The Week Ahead
The outcome of the Federal Reserve’s FOMC deliberations will be closely watched for more than just what is expected to be the first Fed interest rate cut of 2025 (the market is overwhelmingly looking for a 25 basis point cut, though 50 bps is not completely out of the question). We will also be looking at the unanimity of the vote, the updated forecasts, and whether Governor Cook and Dr. Miran will attend the meeting. There will also be a great deal of interest in Chair Jerome Powell’s press conference, including how he handles questions on political independence and Fed reforms.
Other G-7 central bank policy meetings this week include those in Canada, Japan, and the UK. Bloomberg estimates that, along with those in other countries, “rates affecting two-fifths of the global economy… will have been tweaked or reaffirmed.”
Also, look for the remarks of officials attending the two-day ECB conference starting on Wednesday (part of a series of ECB-speak this week, including President Christine Lagarde), along with the central bank’s Survey of Monetary Analysts. In addition, there will be an “informal meeting” on Friday of EU central bank governors and finance ministers.
On the data front, Thursday’s U.S. weekly jobless claims numbers will be more closely watched than usual given the market’s perception of the now greater risk to the employment side of the Fed’s mandate. The data will follow the release of retail sales, which are seen as providing insights into consumers’ willingness (traditionally high) and ability (facing headwinds from higher prices and rising income insecurity) to spend. We will also get cross-border investment data and the leading indicator measure.
Look for inflation prints this week from Canada, the Eurozone and its member countries, Japan, Poland, Saudi Arabia, South Africa, and the UK. Elsewhere, look for…
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UK retail sales and industrial production, which, together with the inflation data, come in the context of a tricky November budget formulation and at a time of unsettled domestic politics.
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Eurozone industrial production and trade data, along with Germany’s ZEW investor confidence measure and sovereign credit rating announcements for Greece, Ireland, and Italy.
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China’s industrial production, retail sales, and unemployment—all coming before Friday’s “Future China Global Forum” in Singapore.
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Argentina’s GDP, trade, and unemployment, which follow last week’s political setback to President Milei.
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Brazil’s GDP, unemployment, and, of course, the policy meeting of its central bank.
