MANUFACTURING PMIs

Eurozone factory output rises for first time in two years

The HCOB Eurozone Manufacturing PMI rose for the third consecutive month in March to 48.6 (February: 47.6). While this still pointed to a deterioration in the health of the goods-producing sector, the PMI signalled a decline that was only modest overall and the softest since January 2023.

Just two of the euro area nations covered by the PMI surveys posted expansionary Manufacturing PMI readings in March – Greece and Ireland. Greece’s upturn was strong overall and the fastest in almost a year, whereas Irish growth lost momentum. Industrial business conditions remained challenging elsewhere, although there were some tentative signs of recovery, particularly in the currency union’s big-two economies of Germany and France as Manufacturing PMI figures here were the highest for 31 and 26 months, respectively.

A renewed increase in factory output across the euro area was the highlight of the latest HCOB PMI survey data. Although only marginal overall, the expansion was the first in two years and the most marked since May 2022. Notably, production growth was accomplished despite a further monthly fall in volumes of incoming new business. New factory orders fell in March, as they have done continuously for almost three years, but the rate of decline was the weakest over this period. Export markets remained a drag on sales performances, with demand from foreign clients decreasing further. That said, the pace of contraction was the softest since April 2022.

The level of backlogged work shrank across the eurozone manufacturing sector in March as a rise in output came in tandem with lower new business intakes. However, the extent to which outstanding orders declined was the least pronounced since July 2022.

Eurozone factories made further cuts to their workforce numbers at the end of the first quarter amid signs of excess capacity. That said, the rate of job shedding cooled from February’s four-and-a-half-year record and was the softest in seven months.

Eurozone manufacturers reduced their quantities of purchases at the end of the first quarter, albeit to an extent that was the least marked in just over two-and-a-half years. Nevertheless, pre-production inventories shrank at a slightly faster pace than in February. Stocks of finished goods were also reduced, as they have done in every month for almost two years.

Meanwhile, surveyed factories in the euro area reported speedier supplier delivery times. In fact, the degree to which vendor performance improved was the greatest since June last year.

Input prices for eurozone manufacturers continued to rise in March, extending the inflationary trend seen in the year-to-date.

The pace of increase also accelerated to a seven-month high but remained muted in comparison to the survey trend. Prices charged for goods produced in the euro area rose marginally amid an intensification of cost pressures, marking the first monthly rise since August last year.

Looking ahead to the coming year, euro area manufacturers foresee greater production volumes, with growth expectations slightly above the series average. However, the level of optimism dipped to a three-month low.

China: Manufacturing sector conditions improve at fastest pace in four months

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) improved to a four-month high of 51.2 in March, up from 50.8 in February. This marked the sixth successive month in which the index has posted above the neutral 50.0 mark, signalling an improvement in manufacturing sector conditions.

Manufacturing production growth accelerated for a third straight month in March and contributed to the latest uplift of the headline index. Chinese manufacturers indicated that they raised production in response to higher new orders. Better demand conditions, alongside successful business development efforts and the launch of new products, underpinned the latest uptick in new business inflows. External demand improved as well, with firms signalling the fastest rise in new export orders in just under a year.

Growth in new orders contributed to a further accumulation of backlogged work. This was the sixth successive month in which the level of unfinished business has increased across the Chinese manufacturing sector. To cope with rising workloads, Chinese manufacturers hired additional staff. This resulted in the first increase in staffing levels since August 2023, albeit only marginal.

Meanwhile, purchasing activity expanded at an accelerated rate to meet production requirements. The sustained expansion of buying activity contributed to a renewed rise in stocks of purchases. Firms also mentioned that they had raised their pre-production inventory holdings as lead times for inputs deteriorated. Shipping delays were often mentioned as the reason for the first lengthening of suppliers’ delivery times since last October.

On the other hand, post-production inventories declined for a second straight month in March as finished goods were shipped out for order fulfilment.

Turning to prices, supplier discounts and reductions in certain raw material costs contributed to the first fall in average input prices in six months. The reduction in cost burdens enabled Chinese manufacturers to reduce their factory gate prices in March. Export charges also fell slightly. Anecdotal evidence suggested that greater market competition weighed on selling prices at the end of the first quarter of 2025.

Finally, business sentiment across China’s manufacturing sector remained positive in March as firms were hopeful that the introduction of new products and promotional efforts would boost sales and output in the next 12 months. That said, the level of optimism slipped further below the series average as some goods producers noted rising uncertainties with additional trade barriers around the world.

Japan: Manufacturing downturn deepens in March

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI®) fell from 49.0 in February to 48.4 in March, to signal a decline in the health of the sector for the ninth successive month. Though modest, the rate of deterioration was the quickest seen for a year.

Data broken down by sector indicated that operating conditions deteriorated at a faster pace across the intermediate and investment goods segments. Consumer goods makers meanwhile signalled the first decline in the health of its sector for eight months.

Manufacturing production in Japan fell for the seventh month running in March, and at the quickest pace in a year. The drop was commonly linked to weaker customer demand, with total new work falling at a similarly solid pace. New export business also declined again, albeit only marginally, with panellists citing muted demand conditions across key markets such as Mainland China and the US.

Lower sales and production requirements led factories to cut back on input buying again in March. Notably, the rate of decline was the quickest seen in just over a year and solid. Inventories of both pre- and post-production items were meanwhile trimmed as firms readjusted stock levels to reflect current demand conditions.

Supplier performance was broadly stable in March, helped in part by reduced demand for inputs.

Although market conditions were relatively subdued, manufacturing firms in Japan added to their workforce numbers in March. Though modest, the rate of job creation was the quickest seen in 2025 so far. The upturn was linked to the filling of vacancies and in anticipation of higher workloads in the months ahead. Greater staff numbers and fewer orders meanwhile contributed to a further reduction in outstanding business, which fell solidly.

Cost pressures remained acute at the end of the first quarter, with firms signalling a further sharp rise in average input prices. Anecdotal evidence indicated that higher costs for labour, materials, energy and transport contributed to greater expenses, alongside an unfavourable exchange rate.

Firms partly passed on their higher cost burdens to customers in the form of higher selling prices. The rate of charge inflation softened to a five-month low, but remained solid overall.

When assessing the one-year outlook, Japanese goods producers were generally confident that output would rise from current levels over the next year. That said, the level of positive sentiment picked up only slightly from February and was the second-lowest since April 2022. Optimism was often linked to forecasts of firmer global demand and an associated boost to sales. However, a number of firms expressed concerns over inflation and increased uncertainty over the international trade environment.

China Says It Is Aiming to Coordinate Tariff Response With Japan, South Korea

China is seeking to coordinate its response to U.S. tariffs with Japan and South Korea, Chinese state media said Monday, as the world’s second-largest economy looks to bolster regional economic collaboration.

Japanese and Korean officials said there was no decision to coordinate action with Beijing, but said the countries have recently discussed trade issues amid three-way talks over the weekend, the first such dialogue in five years.

A social-media account run by China’s state broadcaster said in a Weibo post on Monday that the three countries will strengthen dialogue on supply-chain cooperation and export controls, and plan to conduct speedy negotiations toward a trilateral free-trade agreement.

According to the post, Japan and South Korea are hoping to import some semiconductor raw materials from China, while China is also interested in importing chip products from Japan and South Korea.

A South Korean trade ministry spokeswoman told The Wall Street Journal that there were “some exaggerated aspects” in the Chinese social-media post.

“The three countries exchanged views on the global trade environment, and as you can see in the joint statement, you can understand that they shared an understanding of the need for continued economic and trade cooperation,” she said, referring to a statement published by the three countries on Sunday.

Japan’s trade minister Yoji Muto said at a news conference on Tuesday that the three countries exchanged opinions on the trade environment but added that they didn’t reach any agreement to take joint action against U.S. tariffs.

The comments come after senior trade officials from the three Asian export hubs held their first economic dialogue in five years on Sunday as they gear up for more tariffs from the U.S. this week. (…)

All three are major trading partners of the U.S. running historically high trade surpluses. Japan and South Korea are among the top auto exporters and steel suppliers to the U.S. (…)

In response to the auto tariffs set to take effect on April 3, South Korea said it planned emergency support for the auto industry, with trade minister Ahn Duk-geun saying the industry faced “considerable damage.”

Tokyo has said it will keep asking Trump for a tariff exemption, with Prime Minister Shigeru Ishiba saying Japan will “thoroughly examine the impact on domestic industries and employment and take all necessary measures.”

Relations among Beijing, Seoul and Tokyo have been strained over the years by issues including territorial disputes. Some analysts say that Trump policies could shift relations between the three Asian countries, particularly as Japan and South Korea stand to be among the hardest hit by U.S. tariffs.

“We reaffirmed our conviction that trilateral efforts in the economic and trade sectors are essential for fostering the prosperity and stability of the regional and global economy,” according to a joint statement released by the three Asian countries after the Sunday meeting.

The countries also said Sunday that they will speed up negotiations for a trilateral free-trade agreement, which have been in process since 2012 but have yet to produce tangible results.

• China Ready to Buy More Goods from India as US Tariffs Loom

(…) “We are willing to work with the Indian side to strengthen practical cooperation in trade and other areas, and to import more Indian products that are well-suited to the Chinese market,” the ambassador to India was quoted as saying by China’s state-run Global Times, in a story posted Monday.

Bilateral trade between the neighbors stood at $101.7 billion in 2023-24, according to India’s trade ministry, with India running a significant deficit. India’s main exports include petroleum oil, iron ore, marine products and vegetable oil, amounting to $16.6 billion, according to the government figures. (…)

It is the right choice for the two nations to be partners, Xi said in a message to the president of India, adding that he is willing to deepen coordination in major international matters and jointly safeguard peace in the border areas. (…)

• EU brandishes ‘strong plan’ to retaliate against US tariffs

IN THE REAL WORLD

Tariffs on Screws Are Already Hitting Manufacturers Levies on steel and aluminum are reaching deeper in supply chains and spawning a hunt for domestic producers

(…) Unlike a similar Trump levy in 2018, the latest ones cover a wider range of imports, including the screws, nails and bolts that serve as the connective tissue in manufacturing.

That has set off a hunt to find domestic supplies of some of manufacturing’s smallest components. Tariffs on imported steel and aluminum are already driving up the costs of foreign and domestic metal used to make those components. Manufacturing executives said the U.S. doesn’t have the plants to churn out the amount of steel wire or screws and other fasteners needed to displace imports.

“The production capacity we need doesn’t exist here in the U.S.,” said Gene Simpson, president of Illinois-based fastener maker Semblex. “It’s a select group of suppliers.”

And companies that use screws and other metal parts covered by tariffs say their customers won’t tolerate price increases. Some construction contractors may delay projects until they get a handle on how to blunt the effects of import duties. (…)

Broadening the tariff to more products means steel screws imported from China carry an additional 25% tax that is layered on top of a 45% duty in effect. The enlarged tariff pushes up the cost of a 10-cent screw to 17 cents for an importer, companies said. (…)

At AlphaUSA, about half the of the materials that the Michigan-based auto-parts manufacturer purchases are fasteners. Many of them are made outside the U.S., particularly in Canada, which is now subject to the 25% duty after being exempted for years.

President Chuck Dardas said he expects it will take as long as six months to find U.S. suppliers to replace foreign producers of fasteners. He said the company’s customers often request specialized parts for assembly lines. (…)

Jim Derry, chief executive of Illinois-based Field Fastener, said his company has been receiving letters from customers who are warning that they won’t accept price increases.

“There’s just no way we’re going to sell the products without increasing the costs,” he said. “People are just going to have to pay more for the product.”

Simpson’s firm Semblex produces fasteners for automobiles, industrial lighting, farm equipment and heavy-duty commercial trucks. To make those fasteners, the company uses specialty steel wire. It imports more than half of the wire it uses, mostly from Canada.

As tariffs make imports more expensive, American steel wire producers are raising their prices at the same time. Simpson said cost increases for steel are difficult to quickly pass along to customers, especially in the automotive industry where prices are often locked in monthslong contracts. 

Annie Mecias-Murphy, president of commercial construction company JA&M Developing in Florida, said costs for steel building materials, including steel cable and concrete reinforcing bars, have increased by 5% to 8% on average in recent months. She said the cost of nails has climbed by 4%. (…)

Costs for American companies are rising faster than most everywhere in the world…

• President Trump’s plans to impose 25% tariffs on imported vehicles will hike the average price of cars by as little as $5,000 and as much as $10,000 to $15,000, Wedbush analysts say in a research note. The analysts say the tariffs will wreak havoc on auto supply chains, since even automakers that make cars in the U.S. source around half of their parts from abroad. That means it will take around three years to move 10% of the auto supply chain to the U.S., costing hundreds of billions that will be passed directly to the consumer and push down demand, the analysts say. (WSJ)
• Businesses are racing to adapt and trying to game out what’s to come, which for many means hitting the pause button on even small decisions. At DataDocks, which helps companies like PepsiCo Inc. and and Stitch Fix Inc. coordinate traffic at factory and warehouse loading docks, bookings for the month of April are down 35% from the year before. More worryingly to Nick Rakovsky, DataDocks’s founder, companies that would normally plan deliveries well into the summer months aren’t booking any beyond the first half of April. (Bloomberg)
• “This is the most dramatic shift in confidence that I can recall, except for when Covid hit,” Neel Kashkari, the Minneapolis Fed president since 2016, said last week. “It’s conceivable that the hit to confidence could have a bigger effect than the tariffs themselves.” (BB)
• Tesla executives wrote in a recent letter to US trade officials that new tariffs risked hurting not just the automaker, but overall American competitiveness, by raising the cost of manufacturing in the US. (BB)
• Trump’s victory in November made Picarazzi realize she needed to quit China entirely. During her hastily arranged trip in December, she set in motion plans to move all production to Vietnam, a country that has had a spike in interest in recent years from companies big and small searching for safe havens amid the US-China trade war. The couple, whose home is collateral for a loan to the business, are now waiting in dread to learn which nations the Trump administration will target with reciprocal tariffs in April, a list that could include a large number of countries or a smaller group of a dozen or so with which the US has the largest bilateral trade deficits. “If reciprocal tariffs happen, my whole Vietnam plan is shot,” Picarazzi says. (BB)
• Vietnam’s exports to the US jumped 18% in 2024, and the country logged the third-largest trade surplus with the US. In the two months since Trump took office, Citibin’s tariffs on its China-sourced goods soared beyond all expectations—from 7.5% to 52.5%—while duties on its Vietnam shipments have jumped from zero to 25%, because of levies on aluminum and steel that took effect on March 12. (Unlike those imposed during Trump’s first presidency, the new metal tariffs also apply to downstream products, including nuts and bolts and auto parts.) So far the company is looking at a tariff bill on five of its shipping containers arriving in New York this spring that will be $130,000 higher than it would’ve been before Trump took office. (BB)
• She and her husband have tried to game out the impact on their business from Trump’s various tariff proposals. “We have this spreadsheet we created where every column is a scenario, and I am asking, ‘How many f—ing columns? Why is another being added?’” she says. (BB)
• Picarazzi says she’s explored the possibility of bringing production back to the US but can’t make the math work. She recently sent 20 requests to factories and got back only two quotes, both of which were double her costs in Asia, she says. “I am a patriotic American,” Picarazzi says. “I would be so proud to be able to manufacture here, but no bank is going to give me a loan to start a factory.” (BB)
• Virgin Atlantic said it saw signs of a slowdown in U.S. demand for transatlantic travel. (WSJ)
• European Tourists Start Avoiding the US as ‘Unknown Territory’

French hotel group Accor SA haswarned that forward bookings from Europe to the US are down 25% this summer as travelers that feel put off by US President Donald Trump’s crackdown on immigration divert to other locations.

The company is seeing a “pretty strong deceleration” across the Atlantic, Chief Executive Officer Sébastien Bazin said on Tuesday in a Bloomberg TV interview. The drop is an acceleration from an 18-20% decline in the first 90 days of the year, he said. Travelers are deciding to visit places such as Canada, South America of Egypt instead of the US, Bazin said. (…)

On Monday, Air Canada said bookings for transborder flights between Canadian and US cities were down 10% for the April-to-September period, as Canadians respond to a brewing trade war by avoiding trips south. (…)

• Tariffs could lead to 160,000 job losses in second quarter, Conference Board of Canada says

Canada could see some 160,000 people lose their job in the second quarter, pushing unemployment up to 7.3 per cent, while the economy could shrink at an annualized rate of 5.4 per cent in the quarter, the research group said in a five-year outlook.

The economic hit would come as tariffs lead to real exports falling by a third including over 50 per cent for automotive exports.

The U.S. however will also feel the effects of its trade hostility and see its economy shrink in the second quarter, and the Conference Board is forecasting tariffs could be lifted by July 1 to start a recovery in the third quarter.

“The silver lining is that we anticipate a swift recovery, provided the tariffs remain in place for only three months,” it said. (…)

The Era of Cheap Stuff Was Already Ending. Now Comes the Tariff Threat. Goods prices are rising after decades of deflation, and Trump’s tariffs will give an added push

President Trump’s tariffs threaten to amplify a big inflation challenge: Even before the new levies landed, a long run of everyday stuff getting cheaper was coming to a close.

Most prices gradually go up most of the time. But over the 20 years before the pandemic, the basket of physical products that typical shoppers buy didn’t get even a cent more expensive.

Prices of core goods in the consumer-price index—that is, excluding food and fuel—fell 1.7% between December 2011 and December 2019. Over the same period, prices of core services like housing, healthcare and education rose 2.7% a year. The combined effect of rising service and falling goods prices was a core inflation rate of 2% a year overall.

Goods prices shot up during the pandemic, peaking in summer 2023 then declining over the following 12 months. But in September, core goods prices started rising again, by an average of 0.1% a month, including 0.2% in February. (…)

China’s entry into the World Trade Organization in 2001 kick-started a flood of exports to the U.S.; they grew more than 500% between 1998 and 2014. As a result, inflation for all imported goods was 0.6 percentage points lower a year than otherwise, a study by Monarch and Colin Hottman of the Federal Reserve found.

It will be harder to find those kinds of gains in the future. “There’s no second China waiting to be unleashed on the global economy,” Monarch said.

Energy markets brought yet more luck. Global oil prices were cheaper in 2019 than at the start of the 2010s, aided by America’s fracking boom. That helped reduce manufacturing and shipping costs for domestic and imported goods alike.

Not only are import prices no longer falling, Trump’s tariffs could make them more expensive. (…)

A month into new levies against Canada and Mexico, the cost of moving goods across North American borders is ballooning, said Breanna Leininger, vice president of U.S. operations at Canada’s PCB Global Trade Management.

“I don’t think we’ve ever seen a trade action elicit the kind of response we have now in terms of anxiety, confusion, and changing business patterns,” Leininger said.

A survey of 400 chief financial officers, released this past week by the Richmond Fed, the Atlanta Fed and Duke University, found that companies that don’t import from Canada, Mexico and China expect to raise prices 2.9% this year. But companies that rely heavily on these tariffed countries plan to raise prices 5.1%. (…)

In theory, a one-time increase in tariffs will generate a one-time increase in prices. The inflation rate rises temporarily then falls back once the tariff has been in place for a year or so.

But tariffs can add to inflation pressure in other ways. By reducing competition, trade barriers allow domestic producers to raise prices more. The gap between U.S. and world steel prices has risen sharply since January because of tariffs, for instance. With less foreign competition, domestic producers feel less pressure to adopt the latest technology or boost worker productivity, adding to cost pressures over the long term. (…)

MAKING HISTORY?

Trump’s Tariffs Set to Make History

Senator Reed Smoot and Representative Willis Hawley at the Capitol in 1929.Source: Granger Historical Picture Archive/Alamy

(…) “This is going to be much bigger than Smoot-Hawley,” says Douglas Irwin, an economic historian at Dartmouth College, who points to both the expected leap in tariff rates and the amount of trade covered as likely to eclipse what happened in 1930. “Imports are a much greater share of GDP now than they were back in the early 1930s by a long shot.” Imports of goods and services are 14% of US gross domestic product — about triple the share they accounted for in 1930.

An analysis by Bloomberg Economics found that a maximalist approach could add up to 28 percentage points to the average US tariff rate — resulting in a hit of 4% to US GDP and lifting prices by close to 2.5% over a two- to three-year period. This would be equivalent to lopping more than $1 trillion off US output, or roughly the GDP of Pennsylvania. For comparison, this would be nearly as bad as the impact of the global financial crisis — which left the economy roughly 6% smaller after 3 years than its pre-crisis trend.

Trump’s vocal concerns about value-added tax in Europe and non-tariff barriers in China mean they could face a major tariff shock, and potentially lose much of their exports to the US, Bloomberg Economics found. But because a limited share of GDP is exposed, the economic hit would likely be manageable. Canada and countries in Southeast Asia would likely feel a bigger disruption.

The Bloomberg Economics forecast assumes retaliation by other countries in the form of tariffs on US imports. It doesn’t capture indirect economic costs of the policies, such as how uncertainty about the future might lead companies to shelve investment plans and consumers to put off purchases. (…)

Ed Yardeni: Our New S&P 500 Earnings & Price Targets Under Trump’s Reign Of Tariffs

Yesterday, we reduced the odds of our Roaring 2020s base-case scenario from 65% to 55% and raised the odds of a stagflationary scenario from 35% to 45%. The latter includes the possibility of a shallow recession later this year, following a buy-in-advance shopping spree during April and May. (…)

We still expect that the Roaring 2020s scenario will prevail over the remainder of the decade, as it has so far, but after six to 12 months of heightened stagflationary risks for now. So we are lowering our outlook for S&P 500 earnings per share and our S&P 500 stock price targets for 2025 and 2026. We are still targeting 10,000 for the S&P 500 by the end of the decade. (…)

In our base-case scenario, S&P 500 revenues continue to grow solidly. The risk, of course, is that they won’t do so if Trump’s Reign of Tariffs results in stagflation.

While we aren’t lowering our outlook for revenues (yet), we are lowering our estimates for S&P earnings per share from $275 to $260 this year and from $320 to $300 next year. We are doing so to reflect the rising risks of stagflation, which would entail a growth recession and squeezed profit margins. (…)

Our earnings estimates lead us to forecast that S&P 500 forward earnings per share will be $300 at the end of this year and $350 at the end of 2026.

We are projecting a forward P/E range of 17-20 for this year and next year. The top of the range reflects our base-case scenario remaining intact even this year, while the bottom of the range is more consistent with the risks that could thwart that. If a recession occurs, the forward P/E would be lower than 17.

Our S&P 500 stock price targets are simply equal to our estimates of forward earnings times forward P/Es. So we are currently targeting S&P 500 ranges of 5100-6000 this year and 5950-7000 next year. In our base-case, the S&P 500 would end the year at 6000, a small gain on a year-over-year basis and 7000 at the end of next year.

But Ed, in a recession EPS decline 10-15%, don’t they? So your 17 recession P/E could not apply to $300 EPS.

Don’t Look to the Fed for the Answer to Stagflation

(…) Until recently, the Fed’s sought-after soft landing — inflation gradually returning to its 2% target without higher unemployment — still looked plausible, even though inflation had proved stickier than anticipated and cuts in the policy rate were thus likely to be somewhat delayed.

Suddenly, though, the outlook is much worse — not because monetary policy is now too loose and aggregate demand too high, but because the administration’s threatened trade war could cause prices to spike by disrupting supply. The new threat is stagflation, and the Fed isn’t equipped to handle it.

The remedy for too much demand is tighter monetary policy. That’s the calculation that preoccupies the central bank. But there’s no monetary-policy remedy for inflation induced by a supply-side shock.

If the administration persists with its actual and threatened tariffs, it will deliver exactly that, raising the cost of producers’ inputs, directly adding to consumer prices, and leading workers and investors to expect higher inflation to come. When a central bank responds to supply-side inflation by raising rates, the result is lower output and less-than-full employment.

In short, using monetary policy to fight stagflation is enormously costly. And in such circumstances, the Fed’s dual mandate — stable prices and maximum employment — is simply unachievable. (…)

But Mr. Powell said 2 weeks ago that given a difficult choice, he would favor the economy over inflation.

The Bank of Canada said exactly the opposite.

Weak spending, sticky prices, rising inflation expectations a bad mix for U.S. Federal Reserve

(…) “No matter how you want to slice it, it’s shaping up to be a very weak quarter for real spending, and it may end up being the weakest quarter since the depths of the (pandemic) lockdowns,” Inflation Insights President Omair Sharif wrote.

Goldman Sachs economists following the data’s release cut their forecast for first-quarter growth nearly in half, to 0.6% from 1%.

For the Fed, it could point to the worst of both worlds emerging, with a potential slowdown in growth, prices moving higher, and firms perhaps contemplating more sticker shock as President Donald Trump’s new taxes on imports are put in place.

In the background: Consumer expectations about inflation are grinding higher, while market-based prices for Treasury Inflation-Protected Securities show the outlook for inflation 10 years from now also rising.

Those figures are closely watched by the Fed, and are perhaps even more likely to make policymakers nervous about their grip on inflation and less likely to cut interest rates.

The latest University of Michigan consumer survey showed long-run inflation expectations topped 4% in March, double the Fed’s target. While central bankers don’t like to react to a single month’s data, “long-run expectations have climbed sharply for three consecutive months and are now comparable to the peak readings from the post-pandemic inflationary episode,” survey Director Joanne Hsu wrote. “They exhibit substantial uncertainty, particularly in light of frequent developments and changes with economic policy.”

In the wake of the latest Personal Consumption Expenditures (PCE) data, analysts again tuned into the risk of “stagflation” – or inflation coupled with rising unemployment, a particular dilemma for the central bank. (…)

“The PCE report for February makes grim reading,” wrote Evercore ISI Vice Chair Krishna Guha. “Consumers – like businesses – are pulling back amid … uncertainty and an expected hit to real income from tariff-driven price increases. With core PCE (prices) 2.8% year-on-year even before the main effect of tariffs has hit, there is currently no scope for good news rate cuts.”

Friday’s Personal Income and Outlays report for February pointed to a stagflation environment:

• Real expenditures barely rose (+0.1%), no rebound after slumping 0.6% in January and growing 4.5% annualized rate in Q4’24.
• Spending on services is –0.06% after 2 months, very rare 2-month negative growth outside of recessions.
• This in spite of real disposable income up 0.5% in February after +0.3% in January.
• The savings rate rose from 3.3% in December to 4.3% in January and to 4.6% in February. Worried Americans.
• Headline PCE inflation was up 4.0% annualized for two consecutive months while core PCE inflation reached 4.5% in February, the highest in 12 months.
• Growth in weekly payrolls was 4.9% a.r. in February but averaged only +2.9% a.r. in the last 3 months. Squeezed Americans.
• Services inflation was steady at +3.8% a.r., averaging +4.1% a.r. in the last 3 months vs +3.5% for all of 2024 and +3.0% in H2’24.

• US Consumers Are Panicking Over Reignited Inflation

(…) The final March sentiment index declined to 57 from 64.7 a month earlier, according to the University of Michigan. The latest reading was below both the 57.9 preliminary number and the median estimate in a Bloomberg survey of economists. Consumers expect prices to rise at an annual rate of 4.1% over the next five to 10 years, the data released Friday showed. That’s the highest since—wait for it—1993.

Consumers also see costs rising 5% over the next 12 months, the highest since 2022. But even more foreboding is what Americans see for the country’s jobs market. For years, the US has left the rest of the post-pandemic world behind with low employment levels not seen since the 1960s, when Richard Nixon was president. “Notably,” said Joanne Hsu, director of the Michigan survey, “two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009.” (…)

Gross domestic product is now set to grow 2% in 2025, according to the latest Bloomberg survey of economists, down from the 2.3% estimate in last month’s poll. Their projection for first-quarter growth was marked down a full percentage point to 1.2%.

Americans don’t seem “ok with that little disturbance”, are they?

Friday we get the March employment report.

Indeed Job Postings fell 2.7% between Dec. 31 and March 21 and 0.8% since the end of February:

S&P Global’s latest flash PMI:

Employment rose slightly in April, returning to growth after a small decline in February. The upturn was led by renewed hiring in the service sector. However, even here the rate of job creation was marginal, and much weaker than at the turn of the year.

Some companies reported job losses due to sluggish demand plus a wariness to hire due to the uncertain outlook. Manufacturers in particular reported concerns over payroll numbers and rising costs, cutting headcounts for the first time since last October.

Americans have been outspending their slowing payroll gains each of the last 12 months. Rising inflation and economic uncertainty suggest increased frugality in coming months. With payrolls up 4.6% YoY in February, slowing employment growth, rising inflation and higher savings could critically impact spending growth.

Car Buyers Who Fear Tariff Price Hikes Are Rushing to Dealers

This could help shorter term, but hurt medium term:

(…) Across the country, buyers and sellers are rushing to lock down deals and fill lots before they take effect. (…)

The automaker [GM] is rushing shipments amid a stampede of customers that have come to his showroom looking to get ahead of the higher costs. Many of the new arrivals are Equinox, Trailblazer and Trax, imports that are among Chevy’s least expensive models.

“GM has accelerated the build,” said Paddock, the owner of Paddock Chevrolet in suburban Buffalo, New York. “We’ve got a boatload of vehicles in transit and our floor traffic has been through the roof.” (…)

What happens after that supply runs out remains unclear. Analysts say that automakers will most likely absorb some of the higher costs, dealers may see a hit to profitability and consumers will pay the rest. But exactly how that’s all balanced out is anyone’s guess at this point. (…)

Auto prices are broadly expected to increase by thousands of dollars, with JPMorgan Chase & Co. analysts estimating prices will jump 11% on average. (…)

On the other hand, a rush to buy new cars could limit other discretionary expenditures, including travel plans.

• Hotel News informs us that “hotels used to be able to overbook to compensate for no-shows and still sell out, she said. That’s not the case anymore, for the most part. “You’re not sold out in advance,” she said.”
• Bank of America weekly card spending show that spending on lodging is around 2.5% YoY below 2024 levels and airline spending to be around 6% below 2024 levels as of mid-March, across all income categories. “Unlike other categories of tourism spending, spending on airfares is usually done in advance of travel, sometimes well in advance. It could be that [late] Easter is playing a role here too, but it is potentially worrying if consumers are reining in air travel plans more broadly as this could translate into softer spending in other areas of travel and tourism down the road. Tourism and Travel is worth around 3% of US GDP and directly employs around 6.5 million people.”

BTW:

There has been a pivot from travel to the U.S. from Canada, Mexico and even South America. The tariffs and trade war are making people choose to travel elsewhere. Other countries, including the United Kingdom and Germany, have issued travel advisories to their citizens about trips to the U.S.

“I am concerned about a pretty dramatic drop-off from international travelers, and I think it’s something that the U.S. hospitality industry really needs to pay attention to and speak to, because they spend a lot of money,” she said. “They come over for long stays. They definitely affect the economy of markets beyond the hotel.

“This is something we all need to watch very closely and hope that there is some sort of shift. I think it will have an impact in the summer if things do not change.” (Hotel News)

• The land of the free?

Canada and several European countries have issued travel advisories for the US. While most of the government warnings don’t specify why they were added, the timing points to the the Trump administration’s executive orders regarding immigration and the tightening of border policies. (…)

Many of the European countries that have issued US travel warnings have flagged the White House’s executive order that states “it is the policy of the United States to recognize two sexes, male and female,” potentially causing issues for transgender travelers with self-identified or “X” gender markers on their passports. (…)

Australia-based small-group adventure travel company Intrepid Travel has already started to see “some softening in demand for the US, in particular from Europe,” according to its CEO James Thornton, who notes that US domestic travel (travel by Americans in America) is down by 27% and travel to the US from Europe, the Middle East, and Africa is down by 12.8% compared to last year.

“This could be due to a number of factors, including the strength of the US dollar, but we believe that the US administration’s polarizing approach is definitely having an impact,” he says. (…) (Condé Nast)

We all know that the American consumer is in good financial shape, at least on average. But there is a not so trivial vulnerability to an income or a price shock as Goldman Sachs illustrates:

• The U.S. savings rate is very low by historical standards and compared with other developed countries.

• The pandemic excess savings have been exhausted in the U.S. considering that prices are up 8.1% since mid-2022.

• American households have really splurged on goods since the pandemic, particularly on durable goods. As Jay Powell once said, they may be running out of space…

• In any event, Americans have totally outspent G7 consumers since 2021:

Exhausted pandemic bounties, historically low savings rates, possibly bursting garages, it’s back to basics in America: employment, inflation, confidence. All shaky.

This indicator is not perfect but must nonetheless get some respect:

Households are much more pessimistic on the jobs market outlook

Source: Macrobond, ING

An historically high 51% of U. of Michigan survey respondents offered unsolicited negative mentions about government economic policy. Right or wrong, it clearly reflects high anxiety about the immediate future. Nearly 45% of U.S. households directly or indirectly own equity.

Source: @M_McDonough

The share of Americans expecting higher stock prices in 12 months per the Conference Board survey just collapsed from an all-time high of 57% to 37%. Wealth effect no more?

First-Quarter GDP Growth Estimate Declined

On March 28, the standard GDPNow model estimate for real GDP growth in the first quarter of 2025 is -2.8 percent. The alternative model growth estimate is -0.5 percent.

• Goldman Sachs Lifts U.S. Recession Probability to 35%

EARNINGS WATCH

The Q1’25 earnings season begins next week. Investors will likely largely dismiss the actual numbers and focus on corporate call comments and guidance (if any is realistically offered).

While nearly 60% of analyst revisions in the last month have been negative, earnings are still expected to grow 10.2% in Q2 (from +12.0% on Jan. 1) and 12.4% in Q3 (+13.1%).

For all of 2025, bottom up estimates are $269.12, up 10.9% YoY.

Goldman Sachs’ top down forecast sees 7% EPS growth in 2025, assuming “that US effective tariff rate increases this year by 10 pp to 13%, the highest rate since 1938. We estimate each 5 pp incremental increase in the effective tariff rate would weigh on S&P 500 EPS by roughly 1-2%.”

Importantly, “our EPS estimate assumes that companies are largely able to pass through tariffs to consumers. If companies are unable to pass through tariffs, it could pose greater downside risk to S&P 500 margins and earnings.”

I could not find how the assumed tariffs pass-through impacts Goldman’s revenue growth forecast but its, and most other current forecasts, are wild guesses at best.

• Tariffs are a Trump work in progress (?), fluctuating irrationally, daily and weekly, by number, country, product and other vague considerations.
• How much of the actual tariffs get passed through is unknown just like what will be the impact on inflation, demand and corporate margins. Trump last week told auto executives that “the White House would look unfavorably” on them raising prices because of tariffs. Like if car manufacturers had high enough margins to inconsequentially absorb 25% tariffs on steel and aluminum used in their U.S. plants plus more tariffs on imports of cars and parts. Is there a real businessman in or near the WH? (In an interview with NBC posted on Saturday, Trump said he “couldn’t care less” if carmakers raised prices as a result of the tariffs. “I hope they raise their prices, because if they do, people are going to buy American-made cars. We have plenty,” Trump said.)
• There is as yet no way to factor in the effects of retaliations and how this madness will end.
• What will be the impact on world growth and U.S. exports?

Trump’s mind seems unidimensional in a highly complex world.

The only thing we can reasonably (?) factor in at this time is that nothing good will come out of that. Either higher inflation will hurt demand, and/or profit margins will drop. How much and for how long is totally unknown. We’re all behind the eight ball!

This is still a historically expensive equity market, critically in need of positive visibility. Bloomberg reckons that “In 17 of the past 18 quarters, the S&P 500 gained quarter on quarter when company sentiment either increased or stayed flat, and dropped when it fell, suggesting the benchmark historically prices in poor earnings-call sentiment prior to earnings reports.”

Management sentiment toward hot topics

Mag 7 valuations and earnings forecasts have come under renewed scrutiny amid heightened concerns about China’s accelerating entry into the artificial intelligence (AI) space. Investors are showing worry about returns on investments, but that has yet to be realized in forecasts.

Last night, Goldman’s David Kostin got more cautious:

• Higher tariffs, weaker economic growth, and greater inflation than we previously assumed lead us to cut our S&P 500 EPS growth forecasts to +3% in 2025 (from +7%) and +6% in 2026 (from +7%). Our new EPS estimates are $253 and $269, respectively. These estimates are below both the top-down strategist consensus and the bottom-up consensus of equity analysts.

• Slowing growth and rising uncertainty warrant a higher equity risk premium and lower valuation multiples for equities. The S&P 500 entered 2025 trading at a 21.5x P/E multiple on consensus forward EPS, and currently trades at a multiple of 20x. With little change to consensus EPS estimates, all of the 9% sell-off from the market peak in February has stemmed from valuation contraction. We expect a further valuation decline in the near-term, with the P/E registering 19x in 3 months and rising modestly to 19.5x in 12 months.

Sensitivity of S&P 500 returns to EPS and P/E scenarios

returns relative to S&P 500 closing price of 5581 on March 28, 2025

Source: Goldman Sachs Global Investment Research

• Our baseline forecast assumes the US economy avoids a recession. However, a central forecast of 1.5% average annual GDP growth (and just 1.0% on a 4Q/4Q basis) means recession is a significant possibility, and our economists ascribe a 35% probability to that outcome in the next 12 months. The historical equity market recession playbook implies a roughly 25% S&P 500 drawdown from the recent market peak alongside a 13% decline in earnings. Based on the S&P 500 record high of 6144 in February, this magnitude of decline would suggest a further 17% drawdown to a trough level of roughly 4600.

The S&P 500 has typically declined by about 25% around economic recessions

Source: Goldman Sachs Global Investment Research

At 4600, using $253 EPS and 3.0% inflation, the Rule of 20 P/E would be 21.2. For the R20 P/E to return to its 20.0 median (where it always returns), the S&P 500 would need to touch 4300 or 17x Goldman’s 2025 EPS estimate.

A 20-30% equity bear would send the wealth effect into a serious wealth defect.

Last Friday, Ed Yardeni, still in muddling through mode, nonetheless wondered “Is a depression possible? We aren’t forecasting a depression, just worrying about one. And we suspect you are too.”

This is an abridged version of his excellent essay:

(…) Unfortunately, a lot is going wrong: commodity prices are falling; debtors are resisting austerity programs; agriculture is in a depression; industry is in a recession; nonperforming loans are increasing; banks are failing; the trade deficit is widening; protectionism is gaining support; fiscal policy is gridlocked; and the Fed is in a box.

These are not the sort of problems we associate with the garden-variety postwar business cycle. Rather, they are very reminiscent of the events that triggered or exacerbated the first phase of the Great Depression from 1929 to 1933. The parallels are becoming obvious to all. (…)

Upon reviewing the economic events of 1929 to 1933, we discovered a number of disturbing similarities. And the differences are even more disturbing! Yet, on balance, we conclude that a rerun of the 1930s is not very likely, but it is a risk if trade protectionists have their way.

In our opinion, the single most catastrophic cause of the Great Depression was the Smoot-Hawley Tariff of June 1930—not the stock market crash of October 1929, not the collapse of the Austrian Kreditanstalt Bank in May 1931, not the sharp increase in the Fed’s discount rate during October 1931, not the tax increase of 1932, not the subsequent bank failures or collapse of the money stock. All these events contributed to the economic explosion, but the detonator was the tariff. That’s confirmed by the collapse in industrial production immediately after the tariff was enacted.

Today, protectionist sentiments are spreading at an alarming rate. (…)

But wouldn’t the Federal Reserve avert such a calamitous chain of events by lowering interest rates? For several reasons, we doubt it:

(1) During October 1931, following the sterling crisis, foreign investors lost their confidence in the dollar and demanded gold in exchange for the U.S. currency. To stop the gold outflow, the Fed raised interest rates. This move calmed the external crisis, but intensified the internal crisis as another wave of banks suspended operations. Again, to halt a run on the dollar, the Fed raised interest rates during February 1933.

(2) In 1985, the Fed has resisted lowering interest rates more aggressively, fearing that foreigners then might sell dollars and withhold capital needed to finance the huge federal deficit.

(3) Moreover, the Fed is so worried about reviving actual and expected inflation that interest rates are never cut unless there is unambiguous justification for such a policy move, such as falling commodity prices and sluggish economic activity—they’re deemed sufficient cause. (…)

But the differences are also disturbing!

For example, the Smoot-Hawley Tariff was imposed on a U.S. economy that enjoyed a trade surplus with the rest of the world. Today, the U.S. is running huge trade deficits. As a result, protectionism probably has more grassroots support now than during 1929 and 1930.

During 1932, President Hoover raised taxes to pay for the increase in public-works spending and therefore to balance the federal budget. Today, the federal deficit is so huge that there is no room for another New Deal. Economists are calling for tax increases, not to lower the deficit but to keep it from swelling above $200 billion.

In the May 5, 1930, issue of The New York Times, 1,028 American economists urged Congress and President Hoover not to raise tariffs. They predicted that other countries would inevitably retaliate by raising their tariffs. (…)

Hoover signed the bill on June 17, 1930.” (…)

International trade retaliation on a massive scale soon proved the economists right. Spain, Canada, Italy, Cuba, Mexico, France, Australia, and New Zealand quickly enacted new tariffs. On November 19, 1931, Britain imposed a 50% duty on 23 classes of goods. In July 1932, the Ottawa Conference forced the British Dominions to grant preferences to British goods. Germany resorted to import licensing and bilateral trading arrangements in November 1931. By 1936, 65% of French imports came under a quota system.

Trade became bilateral or regional within existing empires. Quotas, licensing agreements, and prohibitions complemented tariffs. By the mid-1930s, international trade largely had become barter trade. World trade collapsed.

On March 2, 1934, President Roosevelt (…) noted that measured in terms of the volume of goods in 1933, trade had been reduced by about 70% of its 1929 volume; measured in terms of dollars, it had fallen to 35%. “The drop in the foreign trade of the United States has been even sharper. Our exports in 1933 were but 52% of the 1929 volume, and 32% of the 1929 value.” (…)

Trade protectionism set off a chain reaction of lethal financial crises. (…)

President Hoover was defeated for reelection in November. During the long interregnum until Franklin D. Roosevelt took office the following March 4, efforts to arrange cooperation between the incoming and outgoing presidents broke down. (…)

A rerun of the 1930s is not very likely, in our opinion. Pollster Lou Harris notes that the public is ambivalent on trade issues. Three-quarters of the public say they like access to low-cost foreign products. At the same time, three-quarters say there is unfair competition from abroad that is costing the U.S. jobs. On Capitol Hill, most representatives favor free trade, but believe that no other countries are still practicing it.

Clearly, some import-restricting legislation will pass Congress this fall. And protectionist sentiment could be strong enough to override a presidential veto. But a repeat of the Smoot-Hawley disaster is not very likely.

Also, domestic banking and international debt problems are not causing financial panics and a monetary collapse. (…)

International debtors are resisting IMF-style austerity programs. But the debtors have rejected the idea of walking away from their obligations and continue to work out rescheduling agreements with their creditors.

The Federal Reserve is likely to drop interest rates further if the forces of deflation continue to dampen economic growth. Unlike the 1930s, domestic concerns should outweigh foreign exchange objectives in the conduct of Fed policy. Lower interest rates aren’t likely to reaccelerate or reflate the economy, but they’ll help to avert a recession. In other words, we should continue to muddle down the middle.

Friday:

Trump pushes aides to go bigger on tariffs as key deadline nears The president privately tells advisers that import duties represent a generational opportunity to transform the U.S. economy.

President Donald Trump is pushing senior advisers to go bigger on tariff policy as they prepare for what the White House has called “Liberation Day,” the April 2 date he has set for a major escalation in his global trade war, four people familiar with the matter said.

Although many of his allies on Wall Street and Capitol Hill have urged the White House to take a more conciliatory approach, Trump has continued to press for aggressive measures to fundamentally transform the U.S. economy, the people said. (…)

Trump continues to muse to advisers that his administration should continue to escalate the trade measures and has in recent days revived the idea of a universal tariff that would apply to most imports, regardless of their country of origin, the people said, speaking on the condition of anonymity to describe private discussions.

In public and private, the president has said tariffs represent a win-win that will bring manufacturing jobs back to the United States and fill federal coffers with trillions of dollars in new revenue. (…)

At whose expense?

Trump is right on one thing: his import duties represent a generational opportunity to transform the U.S. economy. One way or the other.

Let’s hope Mark Twain was wrong…

And today, on the eve of such an important, world-changing policy announcement, we learn that the WH is still scrambling for the formula:

• “The Trump administration is scrambling to determine the specifics of its new tariff agenda ahead of its self-imposed deadline of Wednesday, weighing options (…).” (WSJ)
• On Sunday night, Trump said “he would target “essentially all” of U.S. trading partners with tariffs of some kind.” (WSJ)
• “You’d start with all countries, so let’s see what happens,” Trump told reporters aboard Air Force One. (Bloomberg)

Just after Signalgate…

Economists Slash Canada Growth Forecasts as Trade War Strikes

(…) The economy will expand at an annualized 0.7% clip in the second quarter of this year, according to the Bloomberg survey of 34 economists. That’s down substantially from the 1.7% pace of growth that was expected between April and June in last month’s survey.

Forecasts were slashed across most growth components — export, investment and household consumption output are all expected to contract over the second quarter. Analysts also trimmed their outlook for the third quarter, when output is expected to rise 0.8%, from 1.5% previously.

Economists are starting to see a stagflationary outlook emerging. Inflation is seen running hotter in the northern nation as retaliatory tariffs and currency depreciation push up costs, leading the yearly change in the consumer price index to average 2.4% this year, up from 2.1% in the prior survey.

The unemployment rate is seen rising to 7% in the last half of the year, 0.25 percentage points higher than expected in last month’s survey. (…)

There’s already evidence that the slowdown in the northern nation has begun — flash growth estimates released Friday by Statistics Canada show the economy stalled in February, and surveys are showing plunges in consumer and business confidence.

The survey was conducted between March 21 and March 26. The odds of a recession in Canada are now at a coin flip, according the 11 economists who responded to the question.

The Bank of Canada next sets interest rates on April 16, and officials have said they plan to “move carefully” with any further changes to interest rates. Economists in the survey expect policymakers will hold borrowing costs at 2.75%, in line with the view of traders in overnight swaps.

Canadians Spurn Flights to US as Trade War Resistance Grows

(…) Bookings made from Canada to the US fell by 13% in February and March compared with a year ago, according to data from Canadian website FlightHub.com. Searches for travel within Canada surged over the same period, toppling the US as the most-searched destination. (…)

Jet travel isn’t the only mode of transportation affected by Canadians’ boycott. Cross-border road trips by Canadian residents in February plunged 23% year over year, according to Statistics Canada.

Meanwhile in China (via John Authers)

Real-time data parsed by China Beige Book points to a renewed loss of steam.

Every key indicator covered by CBB weakened both year-on-year and month-on-month in March — including inflation and employment gauges — while every sector reported slower earnings.

The surge in exports and consumer goods trade-in programs in response to the policy splurge was an overreaction that seems merely to have brought forward purchases that would have been made anyway.

This China Beige Book chart shows every sector reporting weaker revenue — a situation amplified by retailers:

BTW, FYI (still John Authers)

As this Gavekal Research chart shows, American firms and affiliates’ sales in China amounted to more than $600 billion in 2022 — the latest year for which data are available — more than three times the amount of US exports there. Their revenue and assets are exposed to Beijing’s regulatory action, even if nothing interrupts physical trade:

US tells European companies to comply with Donald Trump’s anti-diversity order Move signals push by American president to widen his ideological campaign abroad

The Trump administration has sent a letter to some large companies in the EU warning them to comply with an executive order banning diversity, equity and inclusion programmes. The letter, sent by the American embassy in Paris and others around the EU, said that Donald Trump’s executive order applied to companies outside the US if they were a supplier or service provider to the American government, according to three people familiar with the matter.

The embassies also sent a questionnaire that ordered the companies to attest to their compliance. The document, which the Financial Times has seen, is titled “Certification regarding compliance with applicable federal anti-discrimination law”. The document said: “Department of State contractors must certify that they do not operate any programs promoting DEI that violate any applicable anti-discrimination laws and agree that such certification is material for purposes of the government’s payment decision and therefore subject to the False Claims Act.” (…)