Macro (Re)view (11/4) | Dollar tumbles; yields surge

President Trump's 90-day tariff delay came alongside a significant deterioration in the trade war between the US and China, leading to another hugely volatile week in broad markets. The White House says it has raised tariffs placed on China to 145%, which Beijing has countered with a 125% tariff rate. A sudden stop to trade between the world's two largest economies will have ripple effects more broadly on demand and supply conditions. US equities ended the week higher, but a negative rerating of the US outlook was clear in FX and fixed income. The dollar belied its reserve status, behaving more like an EM currency as it fell below the 100 level for the first time since mid-2023 alongside a brutal selloff in the Treasury market, over the week the 2-year yield lifted by 31bps - despite 3 Fed cuts expected by year-end - while the 10-year yield surged 50bps. Safe-havens CHF and JPY have been favoured, but equally the more cyclically exposed EUR and AUD have gained significantly. Meanwhile, higher daily fixings have indicated China is weakening the Yuan as part of its response to the trade war.  

In any other week, a cooler-than-expected US inflation report would have been the major story; however, it was largely dismissed by markets given the looming impacts to prices from tariffs. This was captured in the University of Michigan consumer survey where year-ahead inflation expectations shot up to 6.7% - the highest reading since 1981. Headline CPI declined 0.1% month-month in March (vs 0.1% expected), slowing from 2.8% to 2.4%yr (vs 2.5%). This was backed up by a weaker reading in the core series at 0.1%m/m (vs 0.3%) and 2.8%yr (vs 3%), down from 3.1% previously.  

Comments from RBA Governor Bullock on the global situation were kept brief during a non-policy related speech on Thursday. A 25bps cut is a lock for the 19-20 May meeting, but a message of stability from the governor gave no sense the RBA is thinking along the lines of a 50bps cut nor convening ahead of schedule to deliver an emergency cut as has been speculated. Instead, the governor said the RBA will take its time to work through various scenarios of what the tariff shock will mean for domestic growth and inflation. The early indications are that households have been unnerved by developments - the Westpac-MI index of consumer sentiment saw a sharp 6% fall in April - but the key for the RBA is in watching how this translates into household spending, business investment and hiring decisions. For businesses, the NAB survey in March business confidence was weak (-3) and conditions were moderate (+4) ahead of the tariff turmoil.  

Macro (Re)view (4/4) | Tariffs rough up markets

A regime change in global trade following the liberation day announcements of higher-than-expected tariffs sent shockwaves through markets this week. Equities were down 8-10% across the US, Europe and Japan - a near 4% fall in Australia looking small in comparison - as investors read the announcements as an impending shock to growth. The expectation is that this will require a response from central banks - the Fed outlook was repriced to 4 cuts by year-end - although that will be complicated by the upward adjustment to prices in the US tariffs will likely drive. In a speech on Friday, Fed Chair Powell stuck with the line that time will be needed to assess the appropriate course of action. Very rarely would a global growth scare lead to EUR appreciation vs the USD but that was the move that occurred this week, while global growth proxy AUD was hit hard.       

The Trump administration's liberation day announcements look set to raise the tariff impost levied by the US to its highest in a century. A 10% across-the-board tariff on nations (including Australia) will come into effect from April 5, while major trading partners have been dealt larger 'reciprocal' tariffs - China 34% (applied on top of earlier tariffs), Japan 24% and EU 20% - commencing April 9, with those rates based on a calculation of a country's trade surplus with the US as a share of imports from that nation, halved to get the tariff rate. Comments from the administration have indicated otherwise, but the scope to negotiate lower tariffs could be limited as the administration is thought to be planning on using revenue raised by the tariffs to fund tax cuts. 

While the March payrolls report was robust, the tariff situation means markets have little confidence in the outlook for the US labour market. Employment on nonfarm payrolls increased by 228k, well above the 140k consensus but with a -48k backward revision going through the numbers over January-February. The unemployment rate was broadly flat, but after rounding was reported to have lifted from 4.1% to 4.2%, which came alongside an uptick in labour force participation from 62.4% to 62.5%. Average hourly earnings at an annual rate softened from 4% to 3.8%. 

The RBA was firmly in wait-and-see mode at this week's policy meeting as the cash rate was left at an unchanged 4.1% (reviewed here). With the economy and inflation tracking broadly in line with the central forecasts published in February, a follow-up rate cut was not considered by the newly-formed Board. Governor Bullock said at the media conference that further confidence in the outlook for inflation to return to the midpoint of the 2-3% target band was key. In other news domestically this week, retail sales lifted 0.2% in February (see here); dwelling approvals flatlined from recent gains (see here); and the trade surplus narrowed sharply to lows since 2020 (see here). 

Australia's trade surplus narrows to $3bn in February

Australia's goods trade surplus came in sharply below expectations to $3bn ($2.97bn) in February, its narrowest since August 2020. A 3.6% fall in exports was the weakest outturn in 5 months and came on the eve of the Trump Administration's 'liberation day' announcements of global tariffs, which included a 10% tax on Australian goods entering the US and an embargo on domestic beef. Imports lifted 1.6% on the month to press new record highs.     

The surplus on goods trade narrowed from $5.2bn in January to $3bn in February, well below the $5.4bn figure expected. Although narrower trade surpluses have prevailed over the past 12 months, the February result was a step down from that. Off the back of this latest result, the 3-month average for the trade surplus narrowed from $5.4bn to $4.3bn - its lowest level since November 2020. 

Exports in the month declined by 3.6% to $42.3bn, a 6.6% fall across the past 12 months. The main movement in February came from non-monetary gold falling 21.4%, partially reversing its surge to record highs in January (78.6%) with market volatility and economic uncertainty fuelling demand. Non-rural goods fell 2.3% on weakness in iron ore (-2.9%) and coal (-6.7%).  

Rural goods advanced 4.4%, the notable movement coming in meat exports (19.7%) on some likely front-running of the Trump Administration's embargo announcement. Cereal exports (2.7%) rose for the 5th month in succession.    

As a side note, Australian exports to the US pulled back slightly in February following their surge in January, with orders brought forward ahead of liberation day.  

Imports in February posted a 1.6% rise to $39.3bn, a record high. Capital goods rose 3.6% while consumption goods saw a 1.2% lift. Meanwhile, despite a large decline in fuel imports (-14.8%) on the back of lower oil prices, intermediate goods were flat in February. Offsetting gains came through in industrial supplies and capital goods parts.    

Australian dwelling approvals -0.3% in February

Australian dwelling approvals were broadly flat in February (-0.3%) against expectations for a larger decline (-1.5%) following gains through December (1.5%) and January (6.9%). Approvals have trended higher over recent months, underpinned by the higher-density segment as high rise approvals have lifted in Sydney and Melbourne. Higher interest rates have weighed on home building activity over the past couple of years; and while the RBA has started easing policy, this will take time to flow through to the sector.   

February dwelling approvals (16.6k) were broadly unchanged from the prior month, at levels up more than 25% on 12 months ago. Approvals lifted by 8.5% across December and January, and with those gains, the 3-month average to February lifted to 16.3k - a high back to October 2022. However, seasonal effects potentially overstate the underlying strength and, as seen in today's result, some softer prints could now follow.    

Detached approvals were near-steady in February (0.2%) at 9.3k on a seasonally adjusted basis. This segment has seen a moderate rise over the past 12 months of 5.2% and the level remains low relative to the series history - particularly when considering the strong rate of population growth over the past decade. Notably in New South Wales and Victoria, house approvals have settled at levels below their ranges that prevailed in the years before the pandemic. 

Higher-density approvals saw a 0.9% decline in February, easing to 7.3k. This segment has driven much of the recent uptrend in approvals; higher-density approvals are up 67.5% across the past 12 months from levels near cycle lows. The major driver of this strength looks to have been in the high-rise category, mainly in Melbourne and Sydney.  

The value of residential alteration approvals (for house renovations) was 0.3% softer in February, with the level remaining elevated at just below $1.2bn. Meanwhile, non-residential approvals (-16.5%m/m) are showing signs of seasonal volatility - these approvals rose by 39% over November-December but have since fallen by 35% through January-February.   

RBA leaves cash rate steady in April

The RBA left the cash rate unchanged at 4.10% today (ES rate 4.0%). With the economy and inflation tracking broadly in line with the forecasts published just a little over a month ago, back-to-back cuts were never in contention. A rate cut is nearly 80% priced at the next meeting on May 20, but with underlying inflation still above the 2-3% target range and the labour market remaining robust, Governor Bullock again pushed back on market pricing for an easing cycle that discounts the cash rate to around 3.5% by year-end. 

Today's statement from the Board maintained the same key themes as in February: underlying inflation is moderating; the outlook remains uncertain; and sustainably returning inflation to target is the priority. Increased confidence that underlying inflation is returning to the 2-3% target opened the door to the cut in February and that progress has since been validated as the trimmed mean eased to 2.7% in the monthly CPI series. However, the Board is understandably cautious on the eve of the Trump administration announcing a swathe of trade tariffs.

In the post-meeting press conference, Governor Bullock said the RBA had been working through a range of scenarios to map out the likely impacts on Australia from a global trade war. In that event, growth was expected to be weaker but the effects on inflation were not clear. A new line was added into today's statement that noted 'monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation'. 

Aside from the uncertainties offshore, domestically the RBA has question marks over how the labour market will evolve and the recovery in household consumption as cost-of-living pressures subside. Last week's federal budget included measures to ease those pressures and, while they were largely an extension of existing policies (energy bill rebates and tax relief), Governor Bullock saying that the Board considered those measures to be 'a wash' as they had largely been factored into the February forecasts should have raised a few eyebrows. The continuation of the energy bill rebates for an additional 6 months for example will have what the RBA would call 'mechanical effects' on inflation - holding it lower for longer before rising later on - and this cannot have been incorporated into the forecasts since the policy was only announced last week. 

The closing paragraphs reaffirmed the Board is taking a data-dependent approach to policy given the uncertainty around the outlook. In practice, this means the data that will come to hand over the coming weeks - wage and inflation updates for Q1 and additional labour market reports in particular - will be key to seeing the rate cut that is largely priced in for May delivered.

Australian retail sales rise 0.2% in February

Australian retail sales lifted by 0.2% in February, disappointing the consensus forecast (0.4%) and softening from the 0.3% rise in January. Annual growth eased from 3.8% to 3.6%. The cost-of-living malaise - despite measures to ease the pressure being felt by households - continues to weigh on household demand.   

Headline sales saw a slower-than-expected rise of 0.2% in February ($37.1bn) following outcomes of 0.3% in January and -0.2% in December. The 3-month average for retail sales slowed on the back of this latest outcome to just 0.1% - the softest momentum in almost 12 months. Measures to assist with the cost-of-living, including the Stage 3 tax cuts and energy bill rebates, are having some effect while the RBA went on to cut rates in February; however, consumption is still soft.

The monthly composition of sales growth shows that basic food (0.6%) underpinned the headline increase. Retail spending excluding food (discretionary sales) declined by 0.1% in the month, its weakest result since last July. Although department stores (1.5%) and clothing and footwear (0.4%) saw increases, this was offset by falls in household goods (-0.3%) and other retailing (-1%). 

Interestingly, retail sales growth swung in several states in the latest month; states that saw gains in January - Victoria, Queensland and Tasmania - all saw declines in February. Meanwhile, New South Wales was the only state that saw a decline in January (-0.3%) but then rebounded in February (0.5%) to post its strongest outturn in 6 months.   

Preview: RBA April Meeting

The RBA is expected to leave the cash rate at 4.10% at today's meeting (decision due 1430 AEDT). In February, the RBA dialled back policy restriction with a 25bps rate cut, lowering the cash rate from the peak level of 4.35% it had maintained since November 2023. But a hawkish tone accompanied the decision as Governor Bullock pushed back on market pricing for an easing cycle through the remainder of 2025. With a rate cut roughly 70% priced for May, markets expect today's meeting to be a low-key event.

Increased confidence in the inflation outlook from easing wage and inflation pressures gave the Board the green light to lower rates in February; a move it described as unwinding the final or 'cautionary' hike from November 2023 to guard against upside inflation risk. Although it decided to cut, the Board judged that policy settings would remain restrictive and also highlighted the risk of easing too aggressively. Governor Bullock pointed to the revised inflation forecasts in the February Statement on Monetary Policy that showed inflation settling above the midpoint of the 2-3% target band in 2026 - higher than previously forecast - if the cash rate was to fall in line with market pricing to around 3.5% by year-end. However, that pricing remains similar going into today's meeting. 

Further progress on inflation remains key to unlocking additional easing. Based on the monthly inflation reads through January-February, that looks likely to be confirmed in the Q1 CPI report (due April 30). Headline CPI is set to slow from 2.4% to around 2.2%Y/Y while the trimmed mean or core rate is on track to ease from 3.2% to around 2.7%Y/Y, progress expected to open the door to a cut in May. In terms of the labour market, the RBA has been clear in its aim to preserve the employment gains since the pandemic. February's fall in employment (-53k) came as a surprise but looks to have been driven by statistical volatility (due to increased retirements) and is therefore unlikely to change the narrative that the labour market remains robust.

Like all central banks, the RBA is facing a myriad of uncertainties - a key factor it will use to justify holding rates steady today. On the domestic front, the May 3 election is on the horizon and Governor Bullock will almost certainly be questioned on the RBA's assessment of last week's federal budget in which additional cost-of-living measures were announced (see here). Offshore, the economic and inflation outlook is subject to significant uncertainty on the eve of the April 2 'liberation day' with the Trump administration due to announce the tariffs it will impose on a reciprocal basis with its trading partners. 

Macro (Re)view (28/3) | Tariff malaise continues

Equities were broadly heavy this week with President Trump's announcement of 25% auto tariffs coming ahead of the April 2 'liberation day' where Trump will outline the tariffs the US will impose on a reciprocal basis with its trading partners. Markets were minded to take equities lower and put modest bids into the dollar and Treasurys. In Australia, the 10-year yield went against the tide moving higher as the Federal budget prompted increased issuance plans for 2025/26.   

  

US inflation moving in the wrong direction rattled sentiment during Friday ahead of the widely expected price impacts of tariffs. The core PCE deflator - the Fed's preferred inflation measure - came in firm relative to expectations in February at 0.4%m/m and 2.8%yr, rising from a prior reading of 2.7%. The report also showed that consumer spending was softer than expected rising by 0.4%m/m and 0.1%m/m in nominal and real terms respectively, speaking to nervousness over the US growth outlook. At the recent March policy meeting, the Fed held a cautious line around further rate cuts and with Chair Powell due to speak next week, markets will look for any shift in this narrative.  

In the UK, the government avoided its Spring Statement from becoming a market event. The DMO's remit for gilt issuance in 2025/26 came in just below GBP300bn, broadly in line with expectations. The high-tax and spend budget handed down last October left Chancellor Reeves with a minimal GBP9.9bn of headroom with which to keep the budget on track to return to balance by the end of the decade - as required by the fiscal rules. But with weaker growth and higher yields subsequently eroding all of that buffer, the Chancellor has had to recalibrate plans. 

For now, spending cuts have been pushed back and tax increases avoided; instead, policy changes are being relied upon to boost growth in order to balance the books. The OBR evaluated the overall effects of those measures to improve the budget position by GBP14bn by 2029/30, restoring the Chancellor's headroom to GBP9.9bn. However, with the state of UK finances remaining finely balanced into what the OBR described as 'risky outlook', markets see tougher decisions on the horizon. The threat of tax rises is keeping prospects for further BoE rate cuts in play, with around 50bps of easing priced into the curve by year-end. That was supported this week by positive surprises on inflation readings in February as headline CPI (0.4%m/m) eased from 3.0% to 2.8%yr and the core rate (0.4%m/m) softened from 3.7% to 3.5%yr. 

No change is expected from the RBA next week given its cautious messaging that accompanied its February rate cut. Data since then has been inconclusive, including February's noisy 53k decline in employment, and while the monthly CPI series this week indicated disinflation progress was continuing in early 2025 - headline CPI eased from 2.5% to 2.4%yr and underlying inflation softened to 2.7%yr in February (see here) - the RBA will wait for the more comprehensive quarterly report. That sets the stage for a live policy meeting on 19-20 May. 

Budget 2025/26 reaffirmed the outlook for fiscal deficits in Australia to run in the order of 1-1.5% of GDP over the coming years. Structural pressures from rising costs in key areas of government spending and policy choices are key drivers of these deficits, but their ultimate scale will largely depend upon how the highly uncertain economic outlook resolves. With the deficit forecast to widen from $27.6bn to $42.1bn in 2025/26, the AOFM has raised its bond issuance target to $150bn from $100bn in the current financial year.

New announcements in the budget were targeted at the cost of living in the lead-up to the May 3 election. Revenue upgrades have provided the government with $12bn of fiscal headroom to announce modest tax relief and an extension of energy bill rebates as the centrepieces of a $7.2bn package of measures to effect in 2025/26. Treasury forecasts the measures will support a rise in the growth outlook from 1.5% to 2.25% in 2025/26; while the extension of the rebates delays the rise in energy bills, pushing back the increase in headline inflation to 3% into 2025/26. For more analysis, please see my detailed review of Budget 2025/26 here. 

Australian CPI 2.4% in February

Australian headline CPI eased from 2.5% to 2.4%yr in February, defying expectations to remain at an unchanged pace. The measures of underlying inflation generally cooled as well. Sustained disinflationary progress in early 2025 will keep pricing for a May RBA rate cut well supported.   

According to the ABS's monthly gauge, prices in February were flat (0%) following a seasonally-related decline in January (-0.2%). Today's print supports the view that the disinflationary progress seen over the back half of last year, which opened the door to the RBA cutting rates at the February meeting, has continued in early 2025. Emphasising this, inflation is either within or below the 2-3% target band in 12-month (2.4%) and 3-month (2.3%) and 6-month annualised terms (1.6%).

Underlying inflation is also within the band at 2.7%yr on a trimmed mean basis, down from 2.8% in January. Meanwhile, broader measures that exclude volatile items (fuel, fruit and vegetables and holiday travel) also have underlying inflation running at 2.7%, little changed over recent months. 

Major price movements in February were mainly seen in the volatile items. Electricity pushed down on inflation due to prices falling by 2.5% in the month, driven by rebates in Victoria. Domestic holiday travel saw a 10.1% fall post the peak summer holidays. Prices for many items in the grocery basket saw modest falls in February; as a result, food inflation eased from 3.3% to 3.1%yr. Meanwhile, new dwelling costs fell 0.1% for the second month running. Price rises in February were led by fuel (1.2%), with clothing and services categories also contributing.   

Overall, goods inflation slowed from 1.8% to 1.3%yr but is up from lows around 0% in late 2024. Services prices held a 3.6%yr pace, a low since late 2022. 

Australian Federal Budget 2025/26: Pressures underpin deficits

The Australian Federal Budget 2025/26 reaffirms the outlook for underlying fiscal deficits to run in the order of 1-1.5% of GDP over the coming years. Structural pressures from major areas of government spending (including in key priority areas) are significant and have net debt on a rising trajectory. Public demand has been a major support to economic growth and employment alongside easing inflation, and this is expected to continue in the near term.  

Budget 2025/26 | Policy Measures

This budget is essentially a refresh of the mid-year update for the 2024/25 budget presented by Treasurer Chalmers just 3 months ago. It includes a number of new policy measures the incumbent ALP will take to this year's federal election - to be held by no later than May 17 - but more announcements are to be expected as the campaigning ramps up. Revenue upgrades have given the Treasurer headroom to announce new measures of $7.1bn in 2025/26 and $25.7bn through to 2027/28, which are targeted at providing cost-of-living support including:   

• Tax relief: expansion of the Stage 3 tax cuts, incrementally lowering the 16% tax threshold (on incomes between $18,201 and $45,000) to 14% by July 2027 (cost of $17.1bn over 5 years)
• Bulk-billed GP visits: providing incentives to boost bulk billing rates ($8.4bn over 5 years)  
• Energy bill rebates: extension of the $75 per quarter rebates to all households through to year-end 2025 ($1.8bn in 2025)
• Medicines: expanding listings on the Pharmaceuticals Benefits Scheme ($1.8bn over 5 years)
• Infrastructure: funding to priority road and rail projects ($1.8bn over 5 years)

Budget 2025/26 | Fiscal Position

Factoring in the new policy measures, Australia's fiscal outlook remains little changed since December's mid-year update (MYEFO) of the 2024/25 budget. Cumulatively, underlying budget deficits are forecast to run up to $142.7bn across the 4 years to 2027/28, a wafer-thin $1.2bn improvement on MYEFO (-$143.9bn). The deficit position widens to a much more substantial $227.6bn by 2027/28 if spending on a broadening set of 'off-budget' measures - headlined by a 20% reduction on student loans (costing $16bn) - is included.

Forecast deficits across the forward estimates reflect a combination of factors that includes slower upgrades to government revenue - associated with easing commodity prices and moderating economic conditions - structural pressures in the 5 largest areas of government spending: debt interest, the NDIS, defence, hospitals and medical benefits, and discretionary spending decisions. Accordingly, as the chart below shows, government payments are set to outpace growth in revenue over the coming years.   

Turning back to the underlying budget position, as reported in MYEFO, the budget returns to deficit this financial year following the successive surpluses posted in 2022/23 ($22.1bn) and 2023/24 ($15.8bn). 

The deficit for 2024/25 is now expected to be -$27.6bn (from -$26.9bn in MYEFO), or around 1% of GDP. The budget is expected to remain in the red across the forward estimates, widening to -$42.1bn or 1.5% of GDP in 2025/26. It then narrows to -$35.7bn in 2026/27 and -$37.2bn in 2027/28, equivalent to 1.2% of GDP in both years.  

As identified earlier, cumulative underlying deficits total $142.7bn through 2027/28, little changed from expectations in MYEFO (-$143.9bn). Although new policy items cost the budget $25.7bn over the period, this has been offset by a $26.9bn increase in estimates variations. 

In 2025/26 and 2026/27 stronger employment conditions than previously expected boosts the government's tax-take (reflected in the green bars) and lowers payments of unemployment benefits (yellow bars). As a result, deficits in these years are narrower than forecast in MYEFO. But the revenue windfall moderates in 2027/28 as the cost of policy decisions increases (orange bars), leading to a wider deficit (-$37.2bn) in that year than forecast in MYEFO.    

The forecast trajectory for deficits sees government net debt as a share of GDP rising from 19.9% this financial year ($556bn) to 22.7% ($714.1bn) by 2027/28. Amid the pandemic in 2020/21, net debt surged to a high of 28.4% of GDP. But with interest rates globally slashed to emergency lows and a strong economic recovery, net debt subsequently fell to a cycle low of 18.4% of GDP by 2023/24. Now with the post-Covid tailwinds turning into headwinds - higher interest rates and slower growth - net debt is forecast to rise again. Following the budget, the AOFM has revised up its planned bond issuance for 2024/25 from $95bn to $100bn. Forecast issuance in 2025/26 is around $150bn.  

Budget 2025/26 | Economic Outlook

The budget adds to a strong fiscal impulse near term, with public demand (5%) remaining the driving factor of GDP growth in 2024/25 (1.5%). As share of nominal GDP, public demand by the end of 2024 was pressing the highs seen during the pandemic crisis. It is worth noting that Treasury estimates the effects of ex-Tropical Cyclone Alfred deducted around 0.25ppt from GDP growth in the current quarter (Q1).    

Overall, the outlook adopted by Treasury for the budget is robust but fairly similar - if anything more pessimistic - to that of the RBA from its recent Statement on Monetary Policy. The economy will need to navigate a hand-off from the public sector to the private sector if the expected pick-up in GDP growth to 2.25% in 2025/26 is to be realised. There are associated risks (in both directions) to the labour market outlook - employment and wages growth - depending on how that transition plays out. 

Broadly, the budget is not seen by Treasury as adding to inflationary pressures. The likely assessment is that the new tax cuts are modest in scale and the effect is spread out over several years. Meanwhile, the extension of the energy bill rebates holds down headline CPI for longer, but inflation will then rise later on reaching 3.0% in 2025/26 (up from 2.75% in MYEFO) as they unwind - assuming there are no further extensions.     

 

Uncertainty around the global economic outlook is significant. Trade tariffs are set on weigh on trade and investment, but Treasury notes there could be spillover effects on consumption and labour markets. The current forecasts have global growth holding at 3.25% over the next 3 years, the weakest outlook since the early 1990s. A softer outlook for growth in China contributes to an expected decline in key commodity prices, reflected in expectations for Australia's terms of trade to fall (see table above).      

  

Macro (Re)view (21/3) | Fed to remain patient

US equity declines stabilised this week amid a less volatile flow of tariff-related headlines. Central bank meetings all going to script with unchanged policy stances from the Fed, BoE, BoJ and Riksbank was also a factor, while the 25bps cut from the SNB was largely expected. ECB President Lagarde told the EU parliament that a tit-for-tat exchange of 25% tariffs with the US could deduct up to 0.5ppt from euro area growth and may raise inflation by around 0.5ppt; although those factors would be a clear negative, market optimism towards the euro area remains buoyed by Germany's fiscal reforms, which passed through the parliament this week.

A largely uneventful Fed meeting saw the Committee reaffirming its message to remain patient in reacting to the concerns markets are expressing over the US growth outlook. Rates were left on hold (4.25-4.5%) for the second meeting in succession as the signalling for two rate cuts by year-end was maintained in the updated Summary of Economic Projections (SEP). The one change made by the Fed this week was to slow the pace of reducing its balance sheet, a pre-emptive move to avoid the risk of money markets seizing up as they did during the last quantitative tightening process in 2019. From April, the redemption cap on Treasury holdings declines from $25bn to $5bn per month; the lower cap meaning more of the principal the Fed receives from maturing bonds each month - amounts in excess of the cap - will be reinvested in the Treasury market going forward. 

With heightened uncertainty clouding the outlook for the US economy, one of Chair Powell's main messages in the post-meeting press conference was that monetary policy was 'in a good place' to respond as the haze clears. The provisional view of the Fed in the SEP is for weaker growth and higher inflation near term, which incorporates some of the expected impact of tariffs. Growth this year was downgraded from 2.1% to 1.7% while inflation on the core PCE deflator was lifted from 2.5% to 2.8%. That combination is set to keep the Fed on the sidelines, and although the sense is the Fed remains on an easing path, markets do not see that as being a decisive enough factor to offset the current malaise.

In London, the Bank of England held Bank Rate steady at 4.5% in an 8-1 vote; MPC member Dhingra casting the sole vote to cut by 25bps, as member Mann sided with the consensus after voting (with Dhingra) for a 50bps cut in February. This meeting was largely a placeholder event, falling between the quarterly 'forecast' meetings at which the BoE has been sequencing its earlier rate cuts. Accordingly, the BoE retained its guidance for taking a 'gradual and careful' approach to the easing cycle, leaving market pricing for an additional 50bps of cuts by year-end intact. Next week's key budget update is set to be of much greater significance for UK assets, with reduced fiscal headroom leaving the government to consider either spending cuts or tax increases. 

Domestically, fiscal policy is also in focus with the federal budget to be handed down next week. Being a pre-election budget, there is likely to be an extension of cost-of-living measures and spending on key areas including health, defence and infrastructure is set to remain elevated. This week, the February Labour Force Survey delivered a shock reporting a near 53k decline in employment against an expected rise of 30k from workers commencing new roles post holidays (reviewed here). The outcome looks to be an aberration as the ABS identified a wave of retirements came into effect in early 2025, resulting also in labour force participation declining sharply from record highs to 66.8% in February. No change in the unemployment rate at 4.1% and slight declines in underemployment (5.9%) and underutilisation (9.9%) continue to point to solid underlying labour market conditions.