{"id":204511,"date":"2025-05-05T09:45:00","date_gmt":"2025-05-05T13:45:00","guid":{"rendered":"https:\/\/ibkrcampus.eu\/campus\/uncategorized\/economic-update-may-5-2025\/"},"modified":"2025-05-06T08:29:53","modified_gmt":"2025-05-06T08:29:53","slug":"economic-update-may-5-2025","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.eu\/campus\/traders-insight\/securities\/macro\/economic-update-may-5-2025\/","title":{"rendered":"Economic Update: May 5, 2025"},"content":{"rendered":"\n

Growth<\/h2>\n\n\n\n

The U.S. economy slowed more than expected in 1Q, with real GDP dropping 0.3% annualized. Consumer spending rose modestly at 1.8%, with goods up 0.5% and services up 2.4%. Private investment surged 21.9% due to inventory spikes before tariffs, while government spending fell 1.4% due to reduced federal spending. Net exports dragged growth by 4.8% due to a 41% import increase. The economy may be closer to recession than expected, strengthening the case for the Federal Reserve to cut rates sooner rather than later.<\/p>\n\n\n\n

Jobs<\/h2>\n\n\n\n

The April Jobs report was relatively muted, indicating the labor market is still in good condition. Nonfarm payrolls increased by 177k, exceeding expectations, while prior months were revised down by 58k, raising the three-month average to 155k. Services led private payroll gains, with health care at the forefront, while manufacturing employment was unchanged. Government payrolls increased but were weighed down by a decline in federal payrolls. The unemployment rate remained at 4.2%, and wages rose 0.2% m\/m and 3.8% y\/y. With a solid report, the Fed should have enough confidence in the health of the labor market for now.<\/p>\n\n\n\n

Profits<\/h2>\n\n\n\n

The 1Q25 earnings season is well underway with 63% of market cap reporting. Currently, consensus is projecting pro forma EPS of $62.74. If realized, this estimate would represent y\/y growth of 10.4% and q\/q growth of -5.3%. Looking at the three main sources of EPS growth, sales, margins and shares are expected to contribute 4.6, 6.8 and -1.1 percentage points, respectively, to y\/y growth. So far, 75% of companies have beaten estimates, and earnings have come in 11.7% above consensus, thanks to a strong Mag 7 beat. Technology is once again contributing the majority of EPS growth, followed by health care on weak comparisons. Energy and materials are still struggling through weak oil prices and muted demand from China. While early results have been solid, management teams are concerned about tariffs and postponing guidance until policy crystalizes.<\/p>\n\n\n\n

Inflation<\/h2>\n\n\n\n

While slightly dated, the March CPI report came in softer than expected, providing evidence that inflationary pressures were at bay ahead of recent tariff announcements. Headline CPI fell 0.1% m\/m and rose 2.4% y\/y as gasoline prices tanked, while core inflation delivered its slowest increase in four years. Core goods prices fell 0.1% m\/m as used vehicle and medical care commodity prices fell. Shelter inflation eased to 0.2% due to weakness in lodging, but primary rent and owners\u2019 equivalent rent were firmer. Excluding shelter, core services inflation fell 0.2% m\/m, lead lower by airline fares and auto insurance. While welcome, investors shouldn\u2019t put too much weight on this report. As businesses adjust to new tariffs, prices should be pressured higher.<\/p>\n\n\n\n

Rates<\/h2>\n\n\n\n

At its March meeting, the FOMC voted to leave the federal funds rate unchanged at 4.25%-4.50%. With tariffs top of mind, updated economic projections reflected expectations for slower growth and higher inflation in the near term. Further out, inflation forecasts were largely unchanged, suggesting the Fed expects any inflationary impulse from tariffs to be transitory. The dot plot was left unchanged with two rate cuts still penciled in for 2025. Turning to the balance sheet, the pace of QT was slowed with the Treasury redemption cap lowered from $25bn to $5bn. The MBS cap was left unchanged at $35bn. With elevated uncertainty, the pace of rate cuts will continue to hinge on incoming economic data.<\/p>\n\n\n\n

Risks<\/h2>\n\n\n\n