TrendForce

2025-02-20

Fed FOMC Minutes: Balance Sheet Reduction May Slowdown or End Sooner

The U.S. Federal Reserve released the minutes of the January FOMC meeting on February 19. The key highlights are as follows: More Data Needed to Support Inflation Decline Federal Reserve officials noted that while inflation in housing services remains elevated, it has been steadily declining, and core non-housing services inflation has shown a similar trend. Although core personal consumption expenditures (PCE) have recently increased due to a high base effect, a three- to nine-month annualized view suggests that inflation progress is more pronounced. However, some officials emphasized that further data may be needed to confirm that inflation has sustainably returned to the target range. Regarding the inflation outlook, factors such as slowing wage growth, stable long-term inflation expectations, and the continued restrictive stance of monetary policy are expected to exert downward pressure on inflation. However, some officials argued that the current interest rate level may not be significantly above the neutral rate. They also pointed out that recent changes in trade and immigration policies, along with strong consumer demand, could make the disinflation process less predictable. Some regional business contacts reported that firms are attempting to pass on tariff-related costs to consumers, and certain inflation expectation indicators have shown an upward trend. Nevertheless, the Fed still expects inflation to continue moving toward the 2% target, albeit with potential hurdles along the way. Two-sided risks balanced, inflation in focus On the labor market, officials generally agreed that labor conditions remain stable, with the unemployment rate at relatively low levels and job openings and quit rates holding steady. Most officials considered the risks to be broadly balanced, though some believed that the risks to price stability remain higher than those to achieving maximum employment. Officials widely recognized that changes in trade and immigration policies, geopolitical impacts on supply chains, and stronger-than-expected consumer spending could increase upside risks to inflation. Over the coming period, distinguishing whether inflation changes are driven by short-term volatility from new government policies or by long-term structural shifts will become increasingly challenging. Balance Sheet Reduction May Pause or End Sooner On the balance sheet reduction (QT) process, the System Open Market Account (SOMA) manager reported that the volume of overnight reverse repurchase agreements (ON RRP) has been steadily declining, but overall reserves remain adequate. However, the issue of the debt ceiling is likely to affect the assessment of reserve adequacy. Since fluctuations in the debt ceiling could significantly impact reserve levels, continuing QT under these conditions might cause reserves to fall below the Fed’s preferred level. Thus, considering a pause or slowdown in QT until the debt ceiling issue is resolved may be an appropriate course of action. Additionally, the SOMA manager outlined several potential scenarios for the conclusion of QT. Under each scenario, principal repayments from agency debt and agency mortgage-backed securities (MBS) would be reinvested into U.S. Treasuries. It is expected that the Fed’s future Treasury holdings will increasingly align with the overall maturity structure of government debt, meaning the proportion of Treasury bills held by the Fed will continue to rise over the coming years. Summary Overall, the minutes of this FOMC meeting indicate that recent economic and labor market resilience, new government policy changes, and inflationary pressures have led the Fed to place greater emphasis on inflation within its dual mandate of "price stability" and "maximum employment." More importantly, the Fed engaged in clearer discussions on potentially pausing or ending QT, which could alleviate market concerns over a sharp decline in liquidity should QT and debt ceiling negotiations unfold simultaneously.

By TrendForce

2025-02-19

Japan’s Exports Grow for Fourth Consecutive Month, Auto Exports to US Surge 20%

Japan’s exports in January amounted to 7.86 trillion yen, growing by 7.2% year-over-year (prior: 2.8%), according to The Ministry of Finance of Japan on February 19.While slightly below the market expectation of 7.6%, exports maintained growth for the fourth consecutive month. Imports surged to 10.62 trillion yen, up 16.7% year-over-year (prior: 1.8%), resulting in a trade deficit of -2.75 trillion yen (prior: 130.94 billion yen). After briefly turning positive last month, the trade balance returned to negative territory, marking the largest deficit in nearly two years. From a product category perspective, January's export growth was primarily driven by transportation equipment, with automobile exports—the largest category—rebounding significantly by 10.5% year-over-year (prior: -5.9%), contributing 1.7 percentage points to overall export growth. In contrast, the previously strong-performing machinery and electronic equipment sectors showed a notable slowdown, with growth decelerating to 0.8% (prior: 3.7%) and -0.6% (prior: 4.7%), respectively. Notably, semiconductor and electronic components saw year-over-year growth slow to 2.2% (prior: 6.5%), while semiconductor manufacturing equipment entered a downturn, with a sharp decline to -1.6% (prior: 10.6%). By region, exports to China continued to decline, falling -6.2% year-over-year (prior: -3.0%). This reflects not only ongoing weakness in the Chinese economy but also Japan’s continued alignment with U.S. restrictions on semiconductor exports to China. Exports of semiconductor electronic components to China saw a sharp year-over-year decline of -13.6% (prior: 6.4%), while semiconductor manufacturing equipment exports plunged further, contracting -20.8% (prior: -10.4%). At the end of January, the Japanese government announced stricter export controls on advanced semiconductors, quantum computing, and other critical technologies, set to take effect at the end of May. In response, China's Ministry of Commerce warned that such measures could harm normal business transactions and mutual interests, stating that China would take necessary countermeasures. Exports to the U.S. rebounded, rising 8.1% year-over-year (prior: -2.1%), with automobile exports reversing their previous weakness and surging 21.8% year-over-year (prior: -6.8%). This suggests that, under the looming threat of potential tariffs from Trump’s administration, U.S. demand for Japanese automobiles may have been brought forward. Japan’s trade surplus with the U.S. reached 477 billion yen in January, while its trade surplus with the U.S. for all of last year stood at 8.6 trillion yen—the fifth-largest in history. This growing trend could further exacerbate U.S. dissatisfaction over its long-standing trade deficit with Japan. The Trump administration continues to introduce additional tariff measures. It has already announced plans to impose a 25% tariff on steel and aluminum-related imports in March and is preparing to negotiate reciprocal tariffs with individual countries. On February 18, the administration further announced intentions to impose a 25% or higher tariff on imported automobiles, semiconductors, and pharmaceuticals, with specific details expected as early as April 2. Given that automobiles account for a significant portion of Japan's exports, with U.S.-bound automobile exports making up nearly 40% of total automobile exports, a swift implementation of auto tariffs could have a substantial impact on Japan’s auto industry and overall economy. The Japanese government is actively seeking exemptions from steel and aluminum tariffs and engaging in negotiations on reciprocal tariffs with the U.S. to minimize potential negative economic impacts on Japan. Read more at Datatrack

By TrendForce

2025-02-17

Key Focus This Week: FOMC Minutes & Japan CPI

Last week, former President Trump announced a 25% tariff on all steel imports into the U.S. and indicated plans to negotiate one-on-one deals with various countries. As the implementation of the tariff policy progressed slower than expected, the S&P 500 index rose by 1.47%, closing at 6,114.63, supported by gains in large-cap technology stocks. In the bond market, despite another uptick in inflation data, investors largely attributed it to short-term factors. Furthermore, reciprocal tariffs have yet to be implemented, keeping the U.S. 10-year Treasury yield stable at approximately 4.47%. Meanwhile, the dollar index continued to decline, reaching around 106.7. Key Economic Data Last Week Taiwan PMI: Taiwan’s January PMI fell to 48.7 (previous: 50.8), ending two consecutive months of expansion. Looking at the subcomponents, new orders declined to 49.7 (previous: 50.9) and production fell to 45.0 (previous: 52.1), both slipping into contraction territory. The decline reflected the fading impact of Lunar New Year pre-holiday restocking as well as reduced working hours due to the holiday period. The employment index dipped slightly to 50.8 (previous: 51.5) but remained in expansion for the ninth consecutive month. Inventory levels contracted for the 23rd straight month, standing at 46.5 (previous: 47.4), indicating effective inventory control. Customer inventories also remained in contraction at 45.3 (previous: 44.5), with the new orders minus customer inventories index only slightly declining to 4.4 (previous: 6.3), reflecting continued resilience in manufacturing demand. Moreover, manufacturers’ outlook for the next six months returned to expansion, breaking a four-month contraction streak. However, the survey was completed before Trump’s tariff announcement, and businesses were more focused on China’s "old-for-new" replacement policy and U.S. infrastructure-related demand. Whether this optimism can persist will depend on the evolution of U.S. tariff policies. Read More at Datatrack U.S. CPI: In January, the U.S. CPI rose 3.0% YoY (previous: 2.9%), marking four consecutive months of acceleration, with a MoM increase of 0.5% (previous: 0.3%). Core CPI grew 3.3% YoY (previous: 3.2%) and 0.4% MoM (previous: 0.2%), all exceeding market expectations. Breaking down the data, the primary drivers of CPI growth were energy, eggs, used cars, and auto insurance, mostly influenced by short-term or seasonal factors. Harsh winter conditions led to increased fuel demand, avian flu caused a spike in egg prices, and California wildfires drove up used car and insurance costs. On the other hand, rent and owners' equivalent rent continued to decline on a YoY basis, indicating that the primary resistance to core inflation is gradually dissipating. Inflation is expected to slowly ease further as new rental contracts come into effect and global oil prices remain under pressure. Read More at Datatrack U.S. Retail Sales: In January, retail sales grew 4.2% YoY (previous: 4.4%) but contracted 0.9% MoM (previous: 0.7%), significantly missing market expectations of a 0.2% decline and marking the steepest drop in nearly two years. Among 13 categories, nine experienced a decline, with automobiles (-2.8%, previous: 0.9%), furniture and home goods (-1.7%, previous: 1.9%), and sporting goods (-4.6%, previous: 3.2%) seeing the sharpest drops. Excluding automobiles and gasoline stations, core retail sales grew 3.9% YoY (previous: 3.9%) but fell 0.5% MoM (previous: 0.5%). Further excluding food services and building materials, the control group retail sales increased 3.8% YoY (previous: 4.1%) but declined 0.8% MoM (previous: 0.7%). While the sharp drop in retail sales may partly be attributed to California wildfires and severe winter weather suppressing brick-and-mortar store activity, early consumption due to tariff concerns—especially in autos and electronics—also appeared to fade. However, given persistently high interest rates and inflation, it remains possible that actual consumer spending willingness has weakened. Further monitoring of retail sales and personal consumption expenditures (PCE) will be necessary to determine whether the resilience observed last year can continue. Read More at Datatrack Key Economic Data This Week FOMC Meeting Minutes (2/20): As widely expected, the Federal Reserve held rates steady at 4.25%–4.50% during its January meeting. Fed Chair Jerome Powell has repeatedly emphasized in public statements that, given strong economic growth and a resilient labor market, combined with reduced policy restrictiveness compared to last year, it is prudent to slow down and assess the impact of current interest rate levels on the economy. This meeting’s minutes will provide key insights into the Fed’s outlook on inflation and its stance on balance sheet reduction, especially as the overnight reverse repurchase agreement (ON RRP) facility has dwindled to approximately $58 billion as of February 14, nearing depletion. Japan CPI (2/21): In December, Japan’s CPI surged past 3% due to a sharp rise in energy and rice prices. However, with energy subsidies set to resume in January, core CPI growth (excluding food) is expected to slow, with market forecasts suggesting a YoY increase of 3.1% (previous: 3.0%). Read More at Datatrack

By TrendForce

2025-02-14

U.S. January PPI Surpasses Expectations, Inflation Climbs to Early 2023 Highs

U.S. Producer Price Index (PPI) for January maintained a year-over-year increase of 3.5% and a month-over-month rise of 0.4% (prior: 0.5%), according to U.S. Bureau of Labor Statistics released data on February 13, both exceeding market expectations of 3.2% and 0.2%, respectively, and marking the highest levels since February 2023. Core PPI increased by 3.6% year-over-year (prior: 3.7%) and 0.3% month-over-month (prior: 0.4%). Breaking down the components, the PPI was primarily driven by the following categories: Goods prices rose 2.3% year-over-year (prior: 1.9%) and 0.6% month-over-month (prior: 0.5%). Core goods prices increased 2.0% year-over-year (prior: 2.2%), with a stable month-over-month gain of 0.1%. Food prices surged 1.1% month-over-month (prior: 0.4%), with egg prices soaring by 44.0% (prior: 0.5%). Energy prices rose 1.7% month-over-month (prior: 2.2%), driven by sharp increases in petroleum and heating oil prices, which climbed 14.2% (prior: 4.3%) and 10.2% (prior: 4.5%), respectively. Services prices increased 0.3% month-over-month (prior: 0.5%), mainly reflecting a decline in transportation and warehousing costs, which slowed to 0.6% (prior: 2.5%). Key components of the Personal Consumption Expenditures (PCE) Price Index showed declines, with outpatient medical services down 0.1% month-over-month (prior: 0.6%), nursing home costs rising only 0.1% (prior: 0.8%), and airline fares dropping 2.1% (prior: 2.6%). Overall, the January PPI data mirrored the sharp increase in egg prices due to avian flu and rising energy costs influenced by winter storms and sanctions on Russia. However, core goods prices remained subdued, services inflation showed signs of slowing, and most PCE-related service prices declined. Compared to the CPI data released on February 12, the PPI report presented a more favorable inflation outlook and could support a slowdown in core PCE services inflation for January. The same day, the weekly jobless claims report showed that initial jobless claims for the prior week stood at 213,000 (prior: 220,000), with the four-week moving average at 216,000 (prior: 217,000). Continuing jobless claims declined to 1,850,000 (prior: 1,886,000), aligning with the labor market’s overall resilience. Following the data release, market expectations for a Federal Reserve rate cut of 25 basis points this year remained unchanged, with the expected timing pushed to around October. Read more at Datatrack

By TrendForce

2025-02-13

US Jan CPI Exceeds Expectations: Short-Term Noise Increases, Fed Rate Cut Delayed

Both CPI and core CPI continued to rise in January, exceeding market expectations, according to the U.S. Bureau of Labor Statistics on February .While the Jan inflation data was driven by several short-term and seasonal factors, housing service prices have maintained a gradual downward trend, indicating that inflation still has room for further cooling in the future. However, Trump's tariff policies and rising market inflation expectations have made the Federal Reserve more cautious in its monetary policy approach. The market now widely expects a limited rate cut this year, with the timing further delayed. The U.S. CPI annual growth rate for January was 3.0% (prior: 2.9%), marking the fourth consecutive month of acceleration, with a monthly increase of 0.5% (prior: 0.3%). Core CPI grew by 3.3% year-over-year (prior: 3.2%), with a monthly increase of 0.4% (prior: 0.2%), both exceeding market expectations. Breaking down the details, the CPI increase was primarily driven by the following categories: Energy prices rose 1.1% month-over-month (prior: 2.4%), with fuel oil prices surging 6.2% (prior: 2.1%). However, declines in other energy prices offset most of the overall gain. Food prices increased by 0.4% month-over-month (prior: 0.3%), with egg prices soaring 15.2% (prior: 0.7%), contributing to over 60% of the food price increase—the highest since June 2015. Core goods prices rebounded to a monthly increase of 0.3% (prior: 0.0%), led by used car prices jumping 2.2% (prior: 0.8%). However, apparel prices fell to -1.4% (prior: 0.1%), partially offsetting the gains. Core services prices rose 0.5% month-over-month (prior: 0.3%), with the largest component—housing services—climbing 0.4% (prior: 0.3%). Rents and owners' equivalent rent remained stable at 0.3%. Additionally, auto insurance costs surged to 2.0% (prior: 0.5%). (Source: BLS) Overall, the increases in energy, eggs, used cars, and auto insurance in this inflation report were all driven by short-term or seasonal factors, such as increased fuel demand due to winter storms, avian flu causing a spike in egg prices, and California wildfires driving up used car and insurance costs. These factors contributed to the additional volatility in January's CPI reading. However, the annual growth rate of housing services prices continued to decline to 4.4% (prior: 4.6%), with rent and owners' equivalent rent annual growth also easing to 4.2% (prior: 4.3%) and 4.6% (prior: 4.8%), respectively. This indicates that the main driver of core inflation is gradually diminishing. As these short-term factors fade, overall inflation is still expected to decline due to continued downward pressure on new lease rents and weak global crude oil prices. However, the pace of decline may be slower than anticipated due to persistent short-term factors and the gradual nature of the housing services price slowdown. Federal Reserve Chair Jerome Powell stated during his congressional testimony on February 11 that given the strong economy and resilient labor market, the restrictive stance of interest rates has already eased. Additionally, Trump's tariff policies have increased inflationary risks and raised consumer inflation expectations. As a result, Powell emphasized that it is more prudent for the Fed to take a wait-and-see approach to assess the impact of interest rates on inflation and the labor market, as well as the implementation of policy measures. Following the latest inflation data release, Powell reiterated during his testimony on February 12 that while the Fed has made significant progress in reducing inflation, "there is still more work to do." This statement reinforced expectations that the Fed will hold off on rate cuts this year to further monitor economic conditions. According to FedWatch , the market now expects only a 25 bps rate cut in 2025, with the timing pushed back to October. Meanwhile, the U.S. 10-year Treasury yield rose by 8.8 bps to around 4.63%. Read more at Datatrack

By TrendForce

2025-02-11

Taiwan's January Manufacturing PMI Falls into Contraction, but Future Outlook Turns Optimistic?

Taiwan’s January PMI declined to 48.7 (prior: 50.8), ending two consecutive months of expansion, according to National Development Council of Taiwan on February 10. From the sub-index perspective, new orders and production both fell back into contraction territory at 49.7 (prior: 50.9) and 45.0 (prior: 52.1), respectively, reflecting the dissipation of the Lunar New Year pre-holiday stockpiling effect and reduced working hours during the holiday, leading to a seasonal slowdown. The employment index edged down slightly to 50.8 (prior: 51.5) but remained in expansion for the ninth consecutive month. Inventories continued to contract for the 23rd consecutive month, standing at 46.5 (prior: 47.4), indicating that overall inventory levels remain well-managed. Customer inventories also remained in contraction at 45.3 (prior: 44.5), while the new orders minus customer inventories spread only slightly declined to 4.4 (prior: 6.3). Additionally, supplier deliveries expanded for the second consecutive month at 51.7 (prior: 52.5), highlighting the resilience in manufacturing demand. From an industry perspective, the electronics and optics sector returned to contraction at 46.4 (prior: 51.6), affected by the seasonal slowdown in consumer electronics demand. The basic raw materials sector (cement, steel) also contracted at 46.6 (prior: 49.3) due to the continued impact of Taiwan’s real estate tightening policies and weakening demand from China and Southeast Asia. However, the food and textile sectors further increased to 54.3 (prior: 52.5), expanding for the fourth consecutive month, reflecting strong domestic consumer demand. Notably, the six-month manufacturing outlook returned to expansion, ending four consecutive months of contraction, with only the power and machinery sector remaining in contraction. However, this survey was conducted before U.S. President Trump’s tariff announcement, and respondents were more focused on China’s trade-in policy and U.S. infrastructure-related demand. Whether optimism can be sustained will depend on the progress of tariff policy implementation. Overall, Taiwan’s January PMI decline was primarily due to short-term disruptions, including the dissipation of pre-Lunar New Year stockpiling and reduced working days during the holiday. Nevertheless, strong AI-driven demand and increasing capital expenditures by major tech firms have led to renewed optimism in the electronics and optics sector. Meanwhile, domestic demand-driven industries, such as food and textiles, continue to show stable growth momentum, indicating resilience in both domestic and international demand. If U.S. tariff policies and the global economic environment become clearer, Taiwan’s manufacturing sector is expected to continue recovering, gradually narrowing disparities across industries. Read more at Datatrack

By TrendForce

2025-02-10

Key Focus This Week: US CPI & Retail Sales

Last week, US equity sectors experienced volatility. Despite the postponement of tariff implementation on Canada and Mexico, the sharp rise in consumer inflation expectations ultimately led to a 0.24% decline in the S&P 500, which closed at 6,025.98. In the bond market, a resilient labor market and rising inflation expectations pushed the 2-year U.S. Treasury yield up by 8.4 basis points to approximately 4.3%. However, the delay in tariff implementation caused the 10-year U.S. Treasury yield to decline by 5 basis points to around 4.5%, while the U.S. dollar index retreated further to approximately 108.3. Key Economic Data Last Week U.S. ISM Services PMI: The U.S. January Services PMI stood at 52.8 (prior: 54.0), marking seven consecutive months of expansion. Among its components, business activity and new orders declined to 54.5 (prior: 58.2) and 51.3 (prior: 54.4), respectively, likely due to the impact of severe winter weather. The employment index rose slightly to 52.3 (prior: 51.4), reaching its highest level since September 2023. This aligns with the ADP private payroll data and the Bureau of Labor Statistics (BLS) nonfarm payroll report, indicating that the labor market in the services sector remains resilient. Meanwhile, supplier delivery times lengthened to 53.0 (prior: 52.5), reflecting further weather-related delays in deliveries. In other sub-indices, the prices index declined to 60.4 (prior: 64.4) amid softer demand, slightly easing concerns about tariff-induced inflationary pressures in recent months. Overall, the slight decline in the January Services PMI can be partially attributed to disruptions caused by winter weather. Although surveyed businesses expressed concerns about potential tariff policy changes, they reported no significant negative impact on operations thus far. Read more at Datatrack UK Interest Rate Decision: The Bank of England (BoE) voted 7-2 to cut rates by 25 basis points to 4.50%, with two members supporting a larger 50 basis-point cut. In its statement, the BoE noted that inflation has eased due to declining energy costs, while wage growth has lost some of its inflationary momentum, making a gradual and cautious rate-cutting approach appropriate moving forward. In terms of economic forecasts, the BoE revised down its GDP growth projections for 2025-2027 to 0.75% (prior: 1.5%), 1.25% (prior: 1.5%), and 1.25% (prior: 1.5%), citing weaker-than-expected Q4 2024 growth, deteriorating business and consumer confidence, and slower productivity growth, which is expected to constrain short-term economic capacity. On inflation, the BoE sharply revised up its 2025 inflation forecast to 3.5% (prior: 2.7%) due to diminishing deflationary effects from energy prices and the planned increase in the household energy price cap by the Office of Gas and Electricity Markets (Ofgem). However, as wage growth pressures and service price inflation are expected to gradually ease, the BoE projects inflation to moderate to 2.5% (prior: 2.25%) in 2026 and return to its 2.0% target (prior: 1.75%) in 2027. Read more at Datatrack U.S. January Employment Situation: Nonfarm payrolls declined to 143,000 (prior: 307,000) in January, impacted by wildfires and severe winter weather. From an industry perspective, the services sector continued to drive job growth, adding 111,000 jobs in January (prior: 275,000). However, the manufacturing sector remained weak, with employment levels largely unchanged over the past 12 months, reinforcing the trend of services sector dominance in job creation. Additionally, the final benchmark revision of nonfarm payrolls showed that March 2024 employment was revised down by 598,000, indicating a continued gradual cooling in the labor market. However, compared to the preliminary revision in August 2023, which lowered payrolls by 818,000, this latest adjustment was less severe, suggesting that the labor market is moving further toward equilibrium. In the household survey, the unemployment rate declined to 4.0% (prior: 4.1%), remaining at historically low levels. Meanwhile, the labor force participation rate edged up to 62.6% (prior: 62.5%), remaining stable. Overall, the data continues to indicate that the U.S. labor market remains resilient. Read more at Datatrack Key Economic Data This Week US CPI（2/12）: Despite mounting concerns over inflation due to tariff policies, high base effects in Q1 and ongoing energy price pressures are expected to temper inflation. The Cleveland Fed projects January CPI YoY growth to slow to 2.85% (prior: 2.89%), while core CPI is expected to moderate to 3.13% (prior: 3.23%). Read more at Datatrack US Retail Sales（2/14）: Although the end of the holiday shopping season, overall consumer spending is expected to remain resilient. Retail sales are projected to remain flat at 0.0% MoM (prior: 0.4%), while the YoY increase is expected to reach 4.8% (prior: 3.9%). Read more at Datatrack

By TrendForce

2025-02-08

US Jan Jobs Resilient, Boost Fed to Hold Rates Steady

The U.S. Bureau of Labor Statistics released its latest employment report on February 7, showing that nonfarm payrolls slowed and slightly missed expectations. However, other data suggest that the labor market remains resilient. Additionally, the University of Michigan's Consumer Sentiment Index, released on the same day, indicated a sharp rise in consumers' one-year inflation expectations due to the impact of Trump's tariff policies. This further reinforced market expectations that the Federal Reserve will keep rates unchanged at the next meeting, leading to a 7.7 and 5.7 basis point increase in the U.S. 2-year and 10-year Treasury yields, respectively. Nonfarm Payrolls Below Expectations, Services Sector Drives Growth U.S. nonfarm payrolls rose by 143,000 (prior: 307,000) in January, falling slightly below the market consensus of 169,000 and the 2024 average of 166,000. By sector, job growth continued to be driven by the services sector, which added 111,000 jobs in January (prior: 275,000). Among them, education and healthcare (+66,000) and retail trade (+34,000) posted the most significant gains. However, the manufacturing sector remained sluggish, with employment levels largely unchanged over the past 12 months, reflecting ongoing sectoral divergence in the labor market. Notably, the Bureau of Labor Statistics emphasized that the impact of California wildfires and winter storms on this survey was limited. However, the number of workers unable to work due to weather-related reasons surged to 591,000, marking a four-year high. This situation is similar to last October, when hurricanes and strikes disrupted labor markets, resulting in a weak 44,000 increase in payrolls, while weather-related work disruptions also peaked at 512,000. Unemployment Rate Remains Near Historic Lows, Overall Market Stability Additionally, the Quarterly Census of Employment and Wages (QCEW) showed that March 2024 nonfarm payrolls were revised downward by 598,000, indicating a gradual cooling of the labor market. However, compared to the 818,000 downward revision in August 2023, the latest revision was relatively moderate. From the household survey, the U.S. unemployment rate declined slightly to 4.0% (prior: 4.1%), remaining near historical lows. The labor force participation rate edged up to 62.6% (prior: 62.5%). Overall, while nonfarm payroll growth slowed this month, the job gains remain within a safe range, and the unemployment rate remains at historically low levels. Combined with data from the Job Openings and Labor Turnover Survey (JOLTS), the U.S. labor market continues to operate in a "low hiring, low layoffs" environment, reinforcing its relative stability. Read more at Datatrack University of Michigan Consumer Sentiment Drops to 7-Month Low on Tariff Concerns The University of Michigan’s preliminary consumer sentiment report, released on the same day, showed that February's consumer sentiment index fell to 67.8 (prior: 71.1), the lowest level since July 2024. The report highlighted broad-based declines in sentiment across different political affiliations, age groups, and income levels. Many respondents felt that it was too late to make advance purchases ahead of tariffs or worried about their inability to avoid the negative impact of trade policies, leading to a 12% drop in durable goods purchase conditions and a 6% decline in personal financial expectations. Furthermore, inflation expectations for the next year surged to 4.3% (prior: 3.3%), marking the highest level since November 2023. Meanwhile, 5-year inflation expectations edged up to 3.3% (prior: 3.2%). Fed Chair Jerome Powell has repeatedly stated in past press conferences that the actual inflationary impact of tariffs is relatively limited, and that long-term inflation expectations are the key factor influencing inflation trends. If long-term expectations remain stable, inflation can still be managed within a controllable range, even after tariffs are implemented. Read more at Datatrack Summary of U.S. January Labor Market Overall, the labor market is gradually cooling but remains stable, while details of the tariff policy have yet to be fully disclosed, leaving long-term inflation expectations uncertain. Given these factors, the market anticipates that the Fed will observe economic developments, including the cumulative impact of last year’s rate hikes and tariff policy implementation, before adjusting its rate-cut trajectory. As a result, market expectations now suggest no rate cuts before Q2 2025, with the total expected rate cut for the year revised downward to 25 basis points. On the day of the data release, U.S. 2-year and 10-year Treasury yields rose by 7.7 and 5.7 basis points, respectively. (Source: CME FedWatch Tool)

By TrendForce

2025-02-07

Latest UK Interest Rate Decision: Dilemma and Economic Outlook

The Bank of England (BoE) announced a 25-basis-point rate cut to 4.50% during its monetary policy meeting on February 6. In addition to maintaining a "gradual" approach to future policy adjustments, this statement indicated a more cautious stance moving forward. The market broadly anticipated a 25-basis-point rate cut in this meeting. However, as internal divisions among committee members on economic prospects and inflation pressures persisted, the final vote unexpectedly passed with a 7-2 majority in favor of a 25-basis-point cut, with two members supporting a 50-basis-point cut. Statement In the statement, the BoE noted that the decline in inflation was largely driven by past reductions in energy costs, and wage growth's impact on price levels had weakened. Additionally, the current restrictive stance of monetary policy has played a role in stabilizing long-term inflation expectations. As a result, adopting a gradual and cautious pace of rate cuts is deemed an appropriate strategy. Economic Outlook The BoE highlighted that the economic performance in Q4 2024 was slightly weaker than previous expectations, with signs of deteriorating business and consumer confidence. Although the labor market has softened, weaker productivity growth has constrained supply, limiting the short-term capacity expansion of the UK economy. Consequently, the BoE revised down its 2025 GDP growth forecast to 0.75% (previously 1.5%) and adjusted the 2026-2027 forecast to 1.25% (previously 1.5%). Inflation Outlook As the negative contribution of energy prices to overall inflation continues to fade, and the Office of Gas and Electricity Markets (Ofgem) is expected to raise the household energy price cap again in April 2025, the BoE has significantly raised its inflation forecast for 2025 to 3.5% (previously 2.7%), with Q3 inflation projected to surge to 3.7% (previously 2.8%). However, as wage growth pressures and service price expectations gradually weaken in the future, the BoE expects inflation to continue declining to 2.5% (previously 2.25%) in 2026-2027 and eventually reach its long-term target of 2.0% (previously 1.75%). Impact of U.S. Tariff Policy Regarding the U.S. tariff policy, as the overall policy framework remains unclear, the BoE did not incorporate explicit economic assumptions related to tariffs. However, it did discuss potential impacts. In 2023, UK exports to the U.S. accounted for approximately 22% of total exports and about 7% of GDP. Although 70% of these exports were services—which would not be directly affected by goods tariffs—there remains a possibility of service tariffs being imposed in the future. Additionally, tariffs imposed on other countries could lead to a decline in imports of UK services. Thus, the potential impact of tariff policies on both the economy and inflation should not be overlooked. (The potential effects of trade tariffs on the UK, Source: Bank of England) Overall, the BoE’s policy direction reflects a significant dilemma between "economic slowdown" and "upside inflation risks." While two committee members supported an immediate 50-basis-point cut, the majority favored a more gradual and measured 25-basis-point reduction. Barring major economic shocks, the likelihood of the BoE embarking on an aggressive rate-cutting cycle remains low. According to interest rate futures data, markets currently expect the BoE to implement an additional 75 basis points of rate cuts throughout the year. Read more at Datatrack

By TrendForce