March Employment Exceeds Expectations While Inflation Declines!
Job growth was much stronger than expected in March with 228,000 new jobs added to the U.S. economy. This was well ahead of the 140,000 estimate, but downward revisions to the January and February reports were substantial. The unemployment rate moved up to 4.2%, higher than the 4.1% forecast as the labor force participation rate also increased. Finally, average hourly earnings increased 0.3% month-over-month (M/M) or 3.8% year-over-year (Y/Y). Healthcare led the job gains in March, followed by retail and social assistance. The government shed only 4,000 jobs despite the efforts of DOGE that have laid off more than 275,000 thus far.
Prices fell more than anticipated in March with headline CPI falling to an annualized rate of 2.4%, down from 2.8% in February. Core CPI, which excludes volatile food and energy, fell from 3.1% in February to 2.8% in March. Slumping energy prices helped keep inflation tame, as a 6.3% drop in gasoline prices helped drive a 2.4% broader decline in the energy index. Shelter prices gained only 0.2% last month and used car prices declined 0.7%. Food prices rose 0.4% M/M. The latest readings on PCE inflation stood at 2.5% for headline PCE and 2.8% for Core PCE. Rate cut expectations by the Fed have been volatile in recent weeks, but as of 4/9/25, markets are pricing in three rate cuts in 2025 with the first cut occurring in June.
Source: U.S. Bureau of Labor Statistics
Soft & Hard Economic Data Sending Mixed Signals
Manufacturing in the U.S. fell back into contraction territory based on the March ISM Manufacturing PMI reading. The headline figure was 49.0 for March, down from 50.3 in February. New orders, production, and employment all weakened, but prices spiked higher — this may suggest some pricing pressures being felt ahead of tariffs. The ISM Services PMI dropped from 53.5 in February to 50.8 in March. Employment and new orders weakened while business activity strengthened.
Retail sales surged 1.4% in March, ahead of the 1.2% estimate. Retail sales excluding autos were also stronger than expected, with sales up 0.5% compared with the 0.3% forecast. The retail sales numbers were strong and suggest robust spending ahead of looming tariffs and potential higher prices. Core retail sales grew 0.4% in March but some of this growth may be pulled forward from the coming months as buyers tried to make sizeable purchases in advance of tariffs. Durable goods orders rose 0.9% in February after surging 3.3% in January. Orders for core capital goods fell 0.3% and shipments of core capital goods rose 0.9%.
PMIs Rebound in the Eurozone & China, China Facing More Deflation
Business activity in the eurozone grew for the third consecutive month in March and rose to a seven-month high at 50.4 (up from 50.2 in February). Manufacturing production increased for the first time in two years, joining services in growth territory. Although the Manufacturing PMI increased to a 26-month high, the 48.7 level remained below 50 which separates contraction from expansion. Perhaps more of a concern was the decline in activity across the service sector, which fell to a four-month low at 50.4. While still sluggish today, the outlook for Germany and the rest of the eurozone looks a bit brighter with the potential for higher defense spending on the horizon. Inflation in the eurozone fell slightly in March. CPI fell from 2.3% in February to 2.2% in March, and core CPI declined from 2.6% to 2.4%. The unemployment rate fell to 6.1% in February.
China continues to show signs of life with March PMI data coming in ahead of expectations. The official Manufacturing PMI was 50.5 in March, the highest reading since March 2024. Production and new orders rose, perhaps signaling improvement in supply and demand. China’s official non-manufacturing PMI hit a three-month high at 50.8 in March. While services showed increased activity, the employment sub-component weakened. The step-up in stimulus measures by the PBOC have boosted infrastructure spending and maintained exports at resilient levels. Economists expect some economic weakness in Q1, largely due to soft service sector and consumer spending trends. The Chinese government is targeting GDP growth of around 5% in 2025 although the tariff impact remains uncertain.
What was the Point of Liberation Day?
Liberation Day came and went and financial markets across the globe experienced turmoil and a spike in volatility. After President Trump slapped much higher tariffs on virtually every country in the world, he reversed course on April 8th when Treasury yields moved sharply higher. A 90-day pause was implemented for all countries willing to negotiate trade agreements. At the same time, Mr. Trump increased tariffs further on China to combat their retaliatory tariffs. One can wonder what the point of this exercise was other than the rattle markets and send asset prices lower. An unwinding of the “basis trade” was cited as an explanation for the extreme move in treasuries with another reason being foreign selling from either Japan or China. Japan is the largest external holder of Treasuries followed by China. If the U.S. becomes an unreliable economic partner, selling could pick up, creating a scenario where yields surge higher.
Sources: Federal Reserve, MacroBond, Apollo Chief Economist
Economic Uncertainty Causing Businesses & Capital Markets to Freeze
Although the situation remains quite fluid, economists estimated the impact from Trump’s tariff policy to be around a 1.5% hit to GDP and a 1.5% increase in inflation. Whether or not a recession occurs depends on the duration of the shock. Economists were forecasting a greater chance of a shallow recession hitting the U.S. but probabilities came down with the policy reversal. We entered 2025 with a favorable outlook for private markets due to the perceived increase in M&A and long-awaited IPO activity. The new administration has created significant economic uncertainty, which has resulted in a decrease in new business investment, an IPO market which remains frozen, and a near halt in M&A activity. Higher policy uncertainty is having a negative impact on capital markets.
Sources: S&P Capital IQ, Apollo Chief Economist
What in the World is the “E” in P/E With all This Tariff Noise?
For Q1, S&P 500 companies are expected to report Y/Y growth in earnings of 7.0% and Y/Y growth in revenues of 4.2% While Q1 earnings are important, they are backward looking and should see little to no impact from recent tariffs. Investors will be laser focused on the guidance and outlooks (if any) issued by corporations as they attempt to navigate the economic and trade uncertainty. The longer this uncertainty carries on, the more vulnerable companies are to an economic downturn and downward revisions to earnings. The S&P 500 is forecast to earn about $270 in 2025 on growth of ~11%. Investors are trying to figure out what earnings will look like this year and what multiple to apply to those earnings based on the economic environment, interest rates, inflation, etc. The table below provides some scenario analysis of possible downside earnings and P/E multiples.
Sources: Conway Investment Solutions, FactSet, as of 4/9/25
The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
