US Economic Weakness and Stubborn Inflation: A Global Ripple Effect
The US economy is showing signs of slowing, coupled with persistent inflation, creating a challenging outlook for global markets. Recent data indicates a weaker-than-previously-reported economic performance at the finish of 2025, with inflation proving more resilient than anticipated. These trends are already impacting financial markets and prompting caution among policymakers.
Core PCE Inflation Rises, Fueling Fed Concerns
US core PCE inflation rose to +3.1% in January, the highest rate since late 2023. The increases in both December and January were at an annualized rate exceeding +4.5%. This figure, the Federal Reserve’s preferred inflation gauge, suggests that underlying price pressures remain strong and could delay any potential interest rate cuts.
GDP Growth Revised Downward
The US economy expanded at an annualized rate of just +0.7% in the fourth quarter of 2025, a significant downward revision from the initial estimate of +1.4%. This marks the weakest performance since a contraction in the first quarter of 2025. Downward revisions were seen across several key areas, including exports, consumer spending, government spending, and investment.
Labor Market Shows Signs of Cooling
The January JOLTS report indicated a slight increase in job openings compared to December, but openings were still down -6% year-over-year. This suggests a gradual cooling in the labor market, although demand for workers remains relatively robust.
Consumer Sentiment Declines Amidst Uncertainty
The University of Michigan sentiment survey fell in March to a three-month low, reflecting growing concerns among consumers. Rising fuel costs – up +18% from a year ago and +9% in a week – and geopolitical uncertainty are key drivers of this decline. Overall sentiment is down -30% from two years ago.
US Debt Concerns Escalate
The Congressional Budget Office is raising alarms about the trajectory of US federal debt, which currently stands at 101% of nominal GDP. Without changes to current fiscal policies, the CBO projects that debt could rise to 175% of GDP within 30 years. A shift in tax revenue sources is likewise apparent, with personal income taxes up +10% while corporate income taxes are down -33%.
Global Economic Snapshot: Canada, India, and China
These US economic headwinds are occurring alongside varied economic conditions globally. Canada’s labor market experienced a significant contraction in February, with a loss of -83,900 jobs, ending the Bank of Canada’s hiking cycle. In contrast, India’s loan growth remains strong, rising +14.5% year-over-year, outpacing GDP growth. China’s new yuan loans rose +¥900 billion in February, slightly less than the previous year.
Commodity Prices on the Rise
Prices for many hard commodities are increasing, including plastics (+32%), steel (+13%), aluminum (+14%), and bitumen (+35%). These rising commodity prices add to inflationary pressures worldwide.
Financial Market Reactions
The UST 10yr yield is currently at 4.28%, up +8 bps from Friday and +17 bps for the week. The S&P 500 is down -0.4% for Friday and -0.8% for the week. The Kiwi dollar has slid against the USD, now trading just under 58.1 USc, a -1c drop in a week. Bitcoin is up +2.2% today and +5.4% for the week, trading at US$71,970.
Frequently Asked Questions
- What is PCE inflation? The Personal Consumption Expenditures Price Index measures the average change over time in the prices paid by consumers for goods, and services.
- Why is the Fed focused on core PCE? Core PCE excludes volatile food and energy prices, providing a clearer picture of underlying inflation trends.
- What does a rising UST 10yr yield indicate? A rising yield generally suggests increased investor expectations for economic growth and/or inflation.
- What is the significance of the Fear & Greed index? It gauges market sentiment, with “extreme fear” often signaling a potential buying opportunity.
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