US Inflation Eases, Trade War Worries Persist

For the week ending 14 March 2025

As of midday Friday, global equities were lower on the week as US tariffs on steel and aluminum went into effect and a trade war continued to intensify. The yield on the US 10-year Treasury note fell to below 4.2% earlier in the week before rebounding to 4.3%, remaining unchanged compared to a week ago. The price of a barrel of West Texas Intermediate crude oil is roughly unchanged at $67.01 per barrel. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), spiked to above 29 mid week before falling back to 22.3.

MACRO NEWS

US inflation eases but remains sticky

US prices increased by 2.8% year over year in February, down from 3% in January. A decline in airline fares contributed to the numbers. Shelter inflation also eased, rising by only 4.2% from a year ago — the smallest increase since the end of 2021. Core inflation, excluding food and energy, rose by 3.1% from the previous year – the lowest reading since 2021 but remains sticky. Inflation concerns have heightened as the US has imposed tariffs on steel and aluminum with the potential for additional tariffs in the coming months. Moreover, the bird flu has caused shortages in eggs and poultry, driving up food prices. On a positive note, the US Producer Price Index inflation, a measure of wholesale prices, was unchanged in February and came in at 3.2% year over year, marking a slowdown from the prior month. The US Federal Reserve is expected to keep its policy rate unchanged at next week’s meeting but remains cautious. If tariffs cause inflation to rise, the Fed's ability to quickly lower rates during any economic downturn may be limited. Currently, markets are anticipating two rate cuts this year.

Trade war intensifies

On Wednesday, US tariffs of 25% on all steel and aluminum imports went into effect after previous exemptions expired. In retaliation, Canada imposed 25% tariffs on US goods that went into effect on Thursday. Similarly, the European Union announced plans to implement counter tariffs on $28 billion worth of US products beginning next month, though the union remains open to negotiations. According to Wolfe Research, tariffs have expanded beyond mere threats despite the partial rollback last week. The actions taken by President Trump have so far raised tariffs by 0.72% of GDP, representing a 267% increase in total US tariffs. The World Trade Organization reported that its Trade Barometer increased slightly to 102.8 from 102.7 in December, suggesting that global trade flows are growing at an average pace. However, the WTO notes that trade may have been temporarily boosted as businesses reacted to rising trade policy uncertainty.

Household consumption weighs on Japan

Japan’s economic growth for the fourth quarter of 2024 was revised down to an annualized rate of 2.2%, compared to the preliminary estimate of 2.8%. Economists had previously anticipated minimal revisions. The slower growth rate is largely due to weaker household consumption, which rose by only 0.8% year over year in January, falling short of the 3.7% consensus estimate. Sentiment among service sector firms dropped to 45.6 in February, the lowest level since July 2022, as consumers reduced discretionary spending amid rising living costs and wages that have not kept up with inflation. Although base pay increased by 3.1% year over year in January, the largest rise in 32 years, real wages, adjusted for inflation, fell by 1.8% from the prior year. Additionally, Japan's economy could face further challenges if tariffs are imposed on Japanese cars exported to the United States. The Bank of Japan is expected to keep rates steady at next week’s meeting. The central bank has indicated that the economy remains healthy and conveyed its intention to gradually increase rates. Furthermore, despite Japan’s 10-year Treasury yields climbing to 1.58% earlier this week — the highest level since 2008 — officials see no need for intervention in the bond market.

QUICK HITS

Earlier this week, the US House of Representatives passed a stopgap spending bill to avoid a government shutdown. The Senate is scheduled to vote on the bill Friday afternoon and is expected to pass it, extending federal funding until the end of September.

Ukraine accepted a US-backed 30-day cease-fire agreement, leading the Trump administration to resume military support to Ukraine earlier this week. Initially, Russia did not agree to an immediate cease-fire but has had productive discussions about a potential settlement, according to President Trump. Further discussions may be necessary to potentially achieve a resolution.

The University of Michigan's Consumer Sentiment index fell to 57.9 in mid-March from 64.7 last month, missing expectations as economic uncertainty continues to worry consumers. Inflation expectations for the next year increased to 4.9%, up from 4.3% last month, marking the highest level since late 2022.

China is experiencing deflationary pressures, with consumer prices dropping by 0.7% in February compared with a 0.5% rise the previous month. Exports, a key driver for China’s economy, slowed to 2.3% year over year, falling short of expectations. With the newly imposed US tariffs, China's economy is likely to face challenges in the coming months, potentially requiring additional stimulus measures to foster growth.

The Bank of Canada cut interest rates by 25 basis points to 2.75% and is expected to remain cautious about future moves amid trade uncertainty.

US job openings rose to 7.74 million in January. Industries such as real estate, finance and retail saw an increase in openings while there was a decline in the professional and business service sector, leisure and hospitality and the federal government.

Industrial production in the eurozone showed signs of improvement in January as Europe worked to increase investment in defense. Manufacturing output increased 0.8% month over month, beating expectations. However, compared with the previous year, production remained stagnant.

The United Kingdom’s manufacturing output decreased by 1.1% in January, leading to an unexpected 0.1% month-over-month shrinkage in economic growth.

The Bank of England recorded that long-run inflation expectations rose in February to 3.6% from 3.4% in the previous survey conducted in November. It was the highest reading since late 2019. One-year inflation expectations jumped to 3.4% from 3.0%. The central bank is expected to keep interest rates unchanged when it meets next week.

Although Australia's consumer confidence index remained below 100, it improved in March, rising by 4% from the previous month and 13.6% compared with the same period last year. This marks the highest level of consumer sentiment in three years, driven by easing inflation and falling short-term interest rates.

Gold futures exceeded $3,000 a troy ounce for the first time in history amid economic uncertainty and in hopes that the Fed will cut interest rates. The demand for gold has increased as investors are turning to the safe-haven commodity as a key portfolio hedge.

THE WEEK AHEAD

Monday: US retail sales, Canada housing starts

Tuesday: US housing starts, US industrial production, Japan policy rate, Canada CPI

Wednesday: Federal funds rate, eurozone CPI, China 1-year loan prime rate, Japan industrial production, Australia unemployment rate

Thursday: Japan CPI, UK policy rate, US existing home sales, UK unemployment rate

Friday: Canada retail sales, UK and eurozone consumer confidence