Powell is in No Hurry South Despite Trade, Labor Risks: Feb. 11, 2025

Investors are pocketing some gains on the back of escalating tensions regarding international commerce. The EU announced that it will respond with tariffs of its own if the US implements levies across the Atlantic. But the selling is only modest, as markets remain supported by strong fundamentals, such as growing earnings, sturdy consumer spending, a healthy labor market and cooperative inflation. Emblematic of the economic momentum was Fed Chair Powell telling the Senate this morning that the central bank is in no hurry to lower interest rates further. Moreover, he cited that the committee’s policy stance is appropriate and that the group is prepared to respond to risks and uncertainties. Top of mind for market participants in terms of vulnerabilities is the potential uptick in price pressures that may stem from a wider trade conflict or a contraction in the labor force as a result of restrictive immigration measures. But these possible headwinds are unlikely to manifest, as President Trump has remained committed to reaching deals with allies rather than bump heads with them and an increase in compensation charges due to a lack of workers may be countered by decelerating shelter expenses. Housing costs have indeed cooperated in the last few CPI reports and the category is poised to transition from a persistent stimulator to a collaborative inhibitor. But today’s monthly report from NFIB on small business optimism offered a reminder of the challenges that enterprises face in filling job openings.

Optimism Among Small Businesses Dips

After jumping to its highest level since the fall of 2018 during the last month of 2024, small business optimism dropped from 105.1 to 102.8, according to last month’s read from the National Federation of Independent Business (NFIB). The result fell below the median estimate of 104.6, but was still strong, remaining substantially above the 51-year average of 98. The gauge was dragged down by owners experiencing difficulty filling job openings and managing inflation associated with inputs and labor. Taxes were cited as the third-most-significant problem following labor and price pressures. Additionally, the net percentage of business owners expecting the economy to improve dropped five percentage points to 47%.

On a positive note, a separate report comprised of larger establishments reached a fresh all-time high. The Bank of America Corporate Sentiment Score, which tracks positive and negative comments made by executives, hit its loftiest level since its creation in 2004.

Markets Tilted Slightly Bearish

Asset values are moving sideways for the most part with markets tilted slightly bearish. All major domestic equity benchmarks are trading south, however, with the Russell 2000, Dow Jones Industrial, S&P 500 and Nasdaq 100 indices down 0.6%, 0.2%, 0.1% and 0.1%. Similarly, sector breadth is deeply negative, with 8 out of 11 segments in the red. The laggards are represented by utilities, financials and consumer discretionary, which are down 0.8%, 0.6% and 0.5%. The gainers, on the other hand, are comprised of materials, energy and technology, which are up 0.7%, 0.4% and 0.2%. Fixed-income instruments are also getting sold at the margins with the 2- and 10-year Treasury maturities changing hands at 4.30% and 4.55%, 2 and 4 basis points (bps) heavier on the session. Additionally, the dollar is facing selling pressure; its gauge is 19 bps lower as the greenback depreciates relative to the euro, pound sterling, loonie and Aussie tender but is limiting the blow by appreciating against the franc, yuan and yen. Commodities are trending south as copper, lumber, silver and gold are lower by 2.5%, 1.1%, 0.4% and 0.2%, but crude oil is higher by 1.4%. WTI is trading at $73.44 per barrel as concerns of sanctions against Tehran and Moscow weigh on the supply outlook. 

Can Shelter Turn to Friend from Foe?

Housing costs have been a consistent driver of services inflation throughout the disinflation that occurred from 2022 to today. And while much of the risks of immigration policy are centered on the possibility for wage pressures to strengthen, not much attention is placed on the shelter element, which should experience an alleviation. The downshift can certainly help to counter the possibilities of loftier goods costs and heavier wage bills. Furthermore, the immense category comprises roughly almost half of the Consumer Price Index (CPI) with its weighting well north of 40%. Finally, we’ve seen a deceleration in housing costs in the last two months and shall it continue, the path toward non-inflationary growth would widen significantly for the Trump administration.

IBKR Forecast Traders are expecting an annualized figure of 2.9% in tomorrow’s CPI.

Source: ForecastEx

ForecastEx Weekly Pick

Chief Strategist Steve Sosnick and Senior Economist José Torres like the “Yes” Forecast Contract for a figure above 2.6% in this Thursday’s Producer Price Index. The “Yes,” currently priced at $0.67, pays a dollar if correct. Torres adds that his estimate of the figure is much higher at 3.2%.

Source: ForecastEx

International Roundup

Canada Building Permits Surge at Year-End

Canada produced a surprisingly strong uptick in building permits during December with the total value of construction approvals jumping 11% m/m to 13.15 billion Canadian dollars, the equivalent of $9.18 billion. Since permits are a preliminary step in projects, the indicator implies that construction activity could be strong this year. The encouraging result was a reversal from two-consecutive months of declines and surpassed Wall Street’s expectation of 1.4%. Multi-unit residential led the gains with a 33.3% increase followed by the 1.8% gain in single-family homes. Conversely, non-residential permits sank 5.9%.

Australian Consumers’ Caution Persists

Australian households continue to have a cautious view of the economy as illustrated by the Westpac-Melbourne Institute Consumer Sentiment Index rising only 0.1% to 92.2 after having fallen in December and January. Strains on family finances and an “unsettled global backdrop” have stalled the gains in sentiment that occurred during the first half of last year, according to Westpac, which is an Australian bank. On a positive note, nearly 50% of survey respondents with mortgages expect rates to decline. Two months ago, only one-third of respondents anticipated that interest rates would fall.

And Business Confidence Sags

Business confidence in Australia sank 3 points to +6 last month, according to the National Australia Bank index of conditions. Sentiment regarding sales and profitability dropped 4 points and 6 points to +6 and -2, with particularly significant weakness for margins expectations in the retail sector. Moving in the opposite direction was the overall opinion of the labor market with the employment index climbing 1 point to +5.

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