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FEBRUARY 2025
UnderTheLens
Macro Analytics - 03/03/25
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THE TRUMP / BESSENT 3-3-3 STRATEGY
OBSERVATIONS: WHAT DOGE HELPS REMIND US ABOUT GOVERNMENT
Though most would agree that too large a government could lead to an inefficient bureaucracy. Small is better to too small could create and even worse problems. How do you continuously determine the level?
Bureaucracies have no natural method of having Schumpeter's "Creative Destruction" occurring, which forces corporations to change and adapt or die. Additionally, waste, abuse and fraud are simply too costly for the private sector to survive the competition rigores that Governments simply don't face.
GOVERNMENT "RIGHT SIZING" & COST CUTTING
With every election Americans have been desensitized to claims of cutting spending and somehow getting everything they want at the same time. Most expect that candidates will say we can have it all. Hypothetically we know that cutting spending and government waste are good things, but they always take second priority to whatever urgent situation or desires we face.
The Department of Government Efficiency (DOGE) takes a radically new approach to this problem of motivation and has created a new means for waste to be cut. It is important to not disregard the fact that there have been many government oversight organizations with the sole purpose of focusing on fraud and waste. DOGE has begun their own efforts of documenting waste and directly cutting excess spending, but they do not seek to undercut previous attempts. Impressively, DOGE has an ability to act that has not been matched by other waste-cutting agencies.
THE CONCERN WITH DOGE
While the goal of cutting spending is undoubtedly good and we are in a situation of spending crisis, DOGE’s unorthodox methods may set a dangerous precedent for future administrations. It serves as an all purpose task force for the president to enforce his will and identify weaknesses in government spending. While past presidents have been frustrated about being stonewalled by various bureaucrats, DOGE creates an embedded network of control that makes the president’s proclamations much more effectual.
While even the left appreciates cutting waste in theory, it is easy to see how such a vital approach to government could be harmful in the future. In the past, layers of inefficiency protected us from radical policies and made systemic change slow. There is no guarantee that a DOGE-type force will only be applied to cutting waste. Even DOGE’s current actions may suggest motives that are less than wholesome. Musk made sure to first attack USAID, which had recently scrutinized him for overcharging the government for Starlink he claimed he would donate. With such an atypical and unsteady start, in the future it could be used to enforce radical social policies or even set the undergirding for a military takeover. DOGE’s effectiveness is the center of its danger.
THE DEBT CRISIS REQUIRES A NEW APPROACH
While there are dangers to be wary of, DOGE could provide a much needed reset for government waste and set the standard for fulfilling campaign promises. It often feels like once elected, presidents have their hands tied and are unable to be judged on the merits of their actions because what happens cannot truly be said to be “them.” This lack of responsibility means that the public is unsatisfied and few things actually happen in a powerful enough way that the citizen can see or feel. ===>
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VIDEO PREVIEW (click image)
Pay-Per-View Page Link
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THIS WEEK WE SAW
Exp=Expectations, Rev=Revision, Prev=Previous
US
US Dallas Fed Manufacturing Business Index (Feb) -8.3 (Prev. 14.1)
US Consumer Confidence (Feb) 98.3 vs. Exp. 102.5 (Prev. 104.1)
US New Home Sales-Units (Jan) 0.657M vs. Exp. 0.68M (Prev. 0.698M, Rev. 0.734M)
US GDP 2nd Estimate (Q4) 2.3% vs. Exp. 2.3% (Prev. 2.3%)
US Core PCE Prices Prelim (Q4) 2.7% vs. Exp. 2.5% (Prev. 2.5%)
US Pending Sales Change MM (Jan) -4.6% vs. Exp. -1.3% (Prev. -5.5%, Rev. -4.1%)
US KC Fed Manufacturing (Feb) -13.0 (Prev. -9.0)
===> The cutting of DOGE will most likely undo bureaucracies that took decades to establish, creating a new normal that will benefit even the most democratic of presidents. If this process was going through Congress, it would be impossible to make real change in four years. Our debt and interest payments are unsustainable and require this sort of radical action if our country is to continue sustaining itself rather than sinking deeper into destruction through indulgence.
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Critics and supporters of DOGE are quick to point out its unfettered nature.
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The critics are hesitant of its freedom from Congress and point out that it seems dangerously near an oligarchy.
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Supporters see its unfettered nature as necessary to compete with the droves of unelected officials and agencies relatively free from Congress.
Countless agencies existing outside of congressional concern and control make it nearly impossible for Congress to understand what they are doing, or even which pathways they must use to rein them in.
LACK OF FOCUS, BANDWIDTH & EXPERTISE
DOGE is a good solution to the fact that Congress will never have the bandwidth to understand the minutiae of waste and fraud occurring in the federal government.
Additionally, much waste and lack of oversight has simple and truly bipartisan solutions. For example, the treasury not having to state what their specific payments were for should be questioned by anyone. This small administrative detail would have never been brought up in congress, but it will ultimately return so much accountability to the American people. If agencies have been able to deny the public the ability to see what’s going on, the public cannot vote accurately.
The freedom of DOGE is necessary to restore faith in the government and make a new standard of transparency.
Even if they overstep and do things that Congress should be responsible for, let us fully realize that we need more transparency and active cost cutting urgently or this country will pay for its nonchalant attitude towards responsibility.
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WHAT YOU NEED TO KNOW!
GLOBAL AI ADOPTION - MAJOR GLOBAL PRODUCTIVITY POTENTIAL
The Cumulative Effect of AI Adoption on Productivity Growth
According to Goldman Sachs' Global Investment Research the global adoption of AI is expected to significantly boost labor productivity and drive economic growth, potentially leading to substantial increases in GDP.
To the right the illustration grades the countries where the greatest potential may be realized.
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RESEARCH - MARKET DRIVERS
1- THE TRUMP / BESSENT 3-3-3 STRATEGY
- Treasury Secretary Bessent thinks 10-year yields can decline as a result of his “3, 3, 3” economic policy targets – 3% Real GDP growth, a 3% Fiscal Deficit and a 3m Barrels per day (bpd) increase in oil production.
- To reduce the fiscal deficit from 7% to 3% of GDP there are only three routes: 1- 10% nominal GDP growth, 2- $1T rise in revenues, and 3- $1tn cut in spending or some combination of the three.
- Our back of the envelope calculations suggest this will take the form of:
1- $400B in Annual GDP Growth through Reduced Oil Prices via a Riyadh Accord
2- $200B in Tariff Revenues
3- $400B in DOGE Savings regarding Waste, Corruption & Fraud
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$1T
2- NVIDIA UNDERWHELMS - The MAG-7 Becomes the LAG-7
- Nvidia Corp. beat expectations for its earnings and sales Wednesday. Yet the share price fell 8.5% the next day. Its growth continues to astonish, but investors were deterred by a dip in the company’s formidable profit margins, and so Nvidia is again worth less than $3 trillion. The total loss in market cap since last month’s tip stands at $730 billion.
- It’s best to take this as confirmation that the market’s demands of Big Tech are changing.
- AI has entered the “show-me” stage. The hit to Nvidia does suggest that investors care about profitability now.
- Investors have come to prefer tech groups who can show they’re profitable, after a protracted period since the launch of Chat GPT when they were most excited to buy anyone who was pouring money into research and development.
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DEVELOPMENTS TO WATCH - POLICY DRIVERS
1 - PRESIDENTIAL MEMORANDUMS - China is now an ADVERSARY!
- President Trump released two unprecedented Presidential Memorandums to the US Government on Friday 02-21-25.
- These directives remove the 2013 preferential nation status given to China by Joe Biden in 2013, along with serious restrictions to China investing, operating or controlling US assets.
- China is now officially a "Foreign Adversary".
- China is preparing for War according to the official news source for the CCP and statements / directives by President Xi Jinping.
- The US under Trump, armed with sufficient proof, is now taking a formal position and preparing for all possible outcomes.
2 - WHERE TRUMP CAN FIND $600B/ANNUALLY OF TAXPAYER MONEY AT THE FED
- Richard Duncan spells out exactly where Trump can find $600B annually of taxpayer money at the Fed, (without Doge's help or an audit of the Fed).
- The Fed has unwittingly (or possibly worse) trapped itself into paying banks and financial institutions interest on Bank Reserves and Repos.
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GLOBAL ECONOMIC REPORTING - ECONOMIC DRIVERS
STAGFLATION MONITOR: SLOW GROWTH & INFLATION
- Q4 GDP GROWTH
- Atlanta Fed Model Suddenly Signals US Recession As Stagflation Takes Hold.
- A recession starting in 2025 would be a real market shocker!
- The Atlanta Fed's GDPNOW model - forecasting US economic growth - just downgraded its estimate of Q1 2025 GDP growth (or lack of it) from +2.3% to -1.5%.
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1- THE TRUMP / BESSENT 3-3-3 STRATEGY
DELIVERING 3-3-3
Trying to get your mind around what is going on in President Donald Trump's head is like trying to walk straight dismounting a carnival ride! To articulate his plan in an easily understood fashion borders on the impossible.
With that said, here is what we view is going on:
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GOALS
Bessent thinks 10-year yields can decline as a result of his “3, 3, 3” economic policy targets – 3% real GDP growth, a 3% fiscal deficit and a 3m barrels per day (bpd) increase in oil production. Yet they are not going to be possible without economic statecraft.
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A 3% FISCAL DEFICIT might see some inroads made by DOGE’s ferreting efforts and the 1% voluntary shrinkage in the federal civil service already achieved, but with permanent tax cuts also lobbied for by Bessent -- and a 15% corporate tax rate by the presiden t-- it would need a lot of new revenue from tariffs, which he also floated.
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A 3% RATE OF REAL GDP growth needs help from the Fed and the long end of the curve, which won’t do so voluntarily while they worry about tariff inflation.
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3M-bpd US OIL EQUIVALENT INCREASE won’t happen via market forces, even if Energy Secretary Wright just announced "Net-zero policies raise energy costs for American families and businesses, threaten the reliability of our energy system, and undermine our energy and national security… the Department's goal will be to unleash the great abundance of American energy required to power modern life and to achieve a durable state of American energy dominance." While our energy analyst Joe DeLaura expects oil prices to drift lower, to get cheap oil the US may have to use the Defence Production Act to force firms to “Drill, baby, drill”; or subsidies – paid for by tariffs(?); or get help from Venezuela -- not in the US camp -- or Iran - -under “maximum pressure”-- or Saudi Arabia, who at current oil prices already can’t afford their megaprojects like the first (and last?) linear city, Neom.
OPTIONS
Government spending = $7tn
Revenues = $5tn
Deficit = $2tn (i.e. 7% of US GDP).
Now, Trump/Bessent want to reduce deficit from 7% to 3% of GDP; but there are only three routes to 3%...
1 - 10% nominal GDP growth per annum cuts deficit to 3% of GDP (assuming spending & revenue static), but obviously inflationary and inflation not popular with voters.
2 - $1T rise in revenues… assuming unchanged taxation (and Trump wants tax cuts), leaves tariffs as go-to for revenues; but US tariffs would need to rise from 2-3% to 30% to generate $1tn in revenue (import duties currently raise $80bn); again big inflation risk, why Trump is delaying them...
... so that leaves…
3 - $1tn cut in spending… $7tn government spends currently roughly split $4tn “mandatory,” $2tn “discretionary,” $1tn interest payments on debt. Math says to stabilize $1tn in interest payments needs US Treasury 5-year yield to fall below 3.3% from 4.4% (but Fed ain’t cutting), and since $4tn in mandatory spending (healthcare, Social Security) politically off limits, that leaves deep cuts in $1tn Defense budget and/or $1tn spent on “government” (Dept of Energy, Dept of Education, Dept of Transportation, etc.) as easiest route to lower US deficit… That's why DOGE so aggressive (populists love smaller government), why era of US fiscal excess over, why Washington D.C. now in recession (see surge in District of Columbia jobless claims)...
... and finally, it's also why Hartnett recommends 30-year Treasury bonds, ahead of the coming flattening of the yield curve, US Treasury outperformance vs bonds in Europe (future fiscal stimulus & Ukraine reconstruction), Japan (end of deflation), and China (economic recovery).
PLAN
1 - $400B in Annual GDP Growth through Reduced Oil Prices via a Riyadh Accord
2 - $200B in Tariff Revenue
3 - $400B in DOGE Savings - Waste, Corruption & Fraud
========
$1T
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2- NVIDIA UNDERWHELMS - The MAG-7 Becomes the LAG-7
BLOOMBERG - 02-27-25
Nvidia Corp. beat expectations for its earnings and sales Wednesday. Yet the share price fell 8.5% the next day. Its growth continues to astonish, but investors were deterred by a dip in the company’s formidable profit margins, and so Nvidia is again worth less than $3 trillion. The total loss in market cap since last month’s tip stands at $730 billion. It’s best to take this as confirmation that the market’s demands of Big Tech are changing.
Investors have come to prefer tech groups who can show they’re profitable, after a protracted period since the launch of Chat GPT when they were most excited to buy anyone who was pouring money into research and development. Following a sharp correction last July, the election helped drive another boost to the Magnificent Seven, but the underlying shift in sentiment seems to have persisted.
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In a possible long-term issue for Nvidia, they also now want to avoid companies that make big capital expenditures. Capex has been booming as execs buy Nvidia chips to compete in an AI arms race.
The following analysis comes from Joseph Mezrich of Metafoura. It shows the results over the last three years for three strategies: Buying the tech stocks with the highest ratio of R&D to sales while shorting those with the least; and doing the same exercise for those with the highest and lowest capex relative to sales, and the highest and lowest return on equity. Starting at the summer correction, investors punished high-capex spenders and looked instead for companies that were profitable.
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Writing before Nvidia results, Mezrich said that investors scrambled from late 2022 into 2024 to invest in companies demonstrating innovation as demanded in the new AI environment:
R&D/sales was a powerful source of return during this period, and even capex/sales added value in Q2 of 2024… However, investors have been losing patience with innovation spending and are now seeking evidence of tangible benefits such as company profitability.
AI has entered the “show-me” stage. The hit to Nvidia does suggest that investors care about profitability now. That’s healthy.
And in a fascinating development, Nvidia’s bad day has also taken the America First trade back to square one. The S&P 500 is now lagging the rest of the world since Election Day.
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1- PRESIDENTIAL MEMORANDUMS
China is now an ADVERSARY!
President Trump released two unprecedented Presidential Memorandums to the US Government on Friday 02-21-25.
These directives remove the 2013 preferential nation status given to China by Joe Biden in 2013 along with serious restrictions to China investing, operating or controlling US assets.
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President Donald J. Trump Encourages Foreign Investment While Protecting National Security 02-21-25
MAKING AMERICA THE WORLD’S GREATEST DESTINATION FOR INVESTMENT: Today, President Donald J. Trump signed a National Security Presidential Memorandum (NSPM) aimed at promoting foreign investment while protecting America’s national security interests, particularly from threats posed by foreign adversaries like the People’s Republic of China.
- The NSPM establishes that welcoming foreign investment is crucial for economic growth, job creation and innovation, ensuring that the United States leverages its world-leading financial markets to support American jobs and innovators.
- The United States will create a “fast-track” process to facilitate greater investment from specified allies and partners, with conditions that prevent investors from partnering with our foreign adversaries in corresponding areas. The United States will also expedite environmental reviews for any investment over $1 billion.
- The Committee on Foreign Investment in the United States (CFIUS) will be used to restrict Chinese investments in strategic U.S. sectors like technology, critical infrastructure, healthcare, agriculture, energy, raw materials and others.
- The United States will protect our farmland and real estate near sensitive facilities, strengthen CFIUS authority over “greenfield” investments and restrict foreign adversary access to U.S. talent and operations in sensitive technologies.
- Rather than use overly bureaucratic, complex and open-ended “mitigation” agreements for U.S. investments from foreign adversaries, more administrative resources will be directed toward facilitating investments from key partner countries.
- The United States will establish new rules to curb the exploitation of its capital, technology and knowledge by foreign adversaries such as China to ensure that only those investments that serve American interests are allowed.
- The Trump Administration will consider new or expanded restrictions on U.S. outbound investment to China in sensitive technologies, including semiconductors, artificial intelligence, quantum, biotechnology, aerospace and more, to stop American funds from supporting China’s Military-Civil Fusion (MCF) strategy.
- The United States will continue to encourage passive investments from all foreign persons – this will allow our cutting-edge businesses to continue to benefit from foreign capital while safeguarding our national security.
- The Trump Administration will protect U.S. investors’ savings and boost American prosperity by auditing foreign companies on U.S. exchanges, reviewing their ownership structures and any alleged fraud, and ensuring foreign adversary companies are ineligible for pension plan contributions.
ENSURING AMERICA’S PROSPERITY AND SECURITY: President Trump is committed to making the United States a premier destination for investment while balancing national security interests.
- The United States is the leading innovator of next-generation technologies, and this action makes it easier for our friends to support U.S. innovators and economic growth.
- Certain foreign countries, including China, systematically direct investment in American companies to gain access to cutting-edge technology, intellectual property and leverage in strategic industries, which must be countered.
- Foreign entities and individuals hold roughly 43 million acres of U.S. agricultural land, which is nearly 2% of all land in the U.S.
- China owns more than 350,000 acres of farmland across 27 states.
- China is exploiting our capital and ingenuity to fund and modernize their military, intelligence and security operations, posing direct threats to United States security with weapons of mass destruction, cyber warfare and more.
- Chinese hackers have repeatedly targeted U.S. entities, including recently breaching the Treasury Department’s CFIUS office, the entity responsible for reviewing foreign investments for national security risks.
SAFEGUARDING AMERICAN INNOVATION: President Trump is keeping his promise to prevent foreign adversaries from taking advantage of the United States.
- President Trump: “We will also adopt new rules to stop U.S. companies from pouring investments into China, and to stop China from buying up America, allowing all of those investments that clearly serve American interests.”
- President Trump also promised to “stop Chinese-owned” firms from “stealing our intellectual property, our workers’ knowledge and then sending it back to Communist China. We’re not going to let that happen.”
- President Trump: “We have powers that haven’t really been used in terms of environmental. If you invest over $1 billion in the United States, we’re going to give expedited reviews.”
- This NSPM builds on numerous actions President Trump took in his first term to protect American innovation, including:
- Initiating a Section 301 investigation into China’s practices related to forced technology transfer, unfair licensing and intellectual property policies.
- Announcing a Department of Justice China Initiative to identify and prosecute trade secrets theft, hacking and economic espionage – a program which the Biden Administration ended.
- Prioritizing research and development of America’s artificial intelligence capabilities.
- Taking action to prevent foreign malign actors from gaining access to United States information networks.
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President Donald J. Trump Issues Directive to Prevent the Unfair Exploitation of American Innovation
SAFEGUARDING AMERICA’S SOVEREIGNTY OVER ITS ECONOMY: Today, President Donald J. Trump signed a memorandum to defend American companies and innovators from overseas extortion.
- This Administration will consider responsive actions like tariffs to combat the digital service taxes (DSTs), fines, practices and policies that foreign governments levy on American companies.
- DSTs allow foreign governments to collect tax revenue from American companies simply because they operate in foreign markets, even though those companies are generally not otherwise subject to foreign jurisdiction.
- President Trump will not allow foreign governments to appropriate America’s tax base for their own benefit.
- This memorandum directs the United States Trade Representative (USTR) to renew the DST investigations under Section 301 that were initiated during President Trump’s first term, and investigate any additional countries that use a DST to discriminate against U.S. companies.
- The Administration will review whether any act, policy, or practice in the European Union or United Kingdom incentivizes U.S. companies to develop or use products and technology in ways that undermine free speech or foster censorship.
- Foreign governments will invite responsive actions from the Administration if they take steps to coerce U.S. businesses to hand over their intellectual property.
- Regulations that dictate how American companies interact with consumers in the European Union, like the Digital Markets Act and the Digital Services Act, will face scrutiny from the Administration.
DEFENDING AMERICAN COMPANIES FROM EXTORTION: President Trump’s memorandum unveils a comprehensive approach to ensuring that U.S. products and services are governed by the United States of America, not foreign governments.
- Rather than position their own companies and workers for success, foreign governments have been taxing the success of America’s companies and workers.
- America’s economy will not be a source of revenue for countries that have failed to cultivate economic success of their own.
- To the detriment of America’s economy, in recent years a number of our trading partners began enacting DSTs to raise revenue for their own government spending.
- Foreign governments could collect billions in DSTs from U.S. companies annually.
- This exploitation goes beyond DSTs to other forms of unfair fines, practices and penalties that undermine the ability of American companies to operate as intended and force them to incur additional compliance costs, lowering U.S. global economic competitiveness.
- In terms of GDP, the United States digital economy has been larger than most countries’ entire economy in recent years, including Australia, Canada and most members of the European Union.
- America’s digital economic dominance is driven by cutting-edge American tech companies, and the American innovation and workers behind them.
RESTORING THE ENTREPRENEURIAL SPIRIT OF AMERICA: President Donald J. Trump has a track record of protecting American manufacturers and empowering American innovators and workers.
- During his first administration, President Trump initiated Section 301 cases against DSTs and negotiated platinum-standard rules for digital trade with Japan and separately through the USMCA.
- President Trump demonstrated in his first term that punitive measures like tariffs strengthened the U.S. economy and brought back American industry.
- Just last week, President Trump announced the “Fair and Reciprocal Plan” on trade to restore fairness in U.S. trade relationships and counter non-reciprocal trade agreements.
- On Day One, President Trump initiated his America First Trade Policy to make America’s economy great again.
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2 - WHERE TRUMP CAN FIND $600B/ANNUALLY OF TAXPAYER MONEY AT THE FED
Elon Musk recently said that DOGE will audit the Fed — but the truth is, the Fed is already audited every year by KPMG, one of the Big Four accounting firms. So, will another audit uncover fraud? Probably not.
But what if you were told you that the real scandal isn’t hidden in the Fed’s accounting— it’s hiding in plain sight?
For the past few years, the Fed has been diverting hundreds of billions of dollars away from taxpayers and into the hands of commercial banks and money market funds — for no sound sustainable reason.
This is where DOGE should focus its attention. The savings here could dwarf all of DOGE’s other achieved savings combined.
- 📉 How much has this cost U.S. taxpayers?
- 📉 Why is the Fed making enormous losses instead of record profits?
- 📉 And most importantly—how can this be stopped?
The answers might surprise you. And the fix is simple.
My esteemed colleague Richard Duncan spells this out with 46 slides in his latest 30 minute Macro Watch video. Richard reveals exactly how the Fed’s disastrous policy is draining taxpayer money — and what must be done to fix it.
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GLOBAL ECONOMIC INDICATORS:
What This Week's Key Global Economic Releases Tell Us
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STAGFLATION = LOW GROWTH + INFLATION
STAGFLATION WATCH = GROWTH (UNEMPLOYMENT, LAYOFFS, BANKRUPTCIES) +INFLATION MONITORS
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GDPNow REAL GDP ESTIMATES FOR Q1
Atlanta Fed Model Suddenly Signals US Recession As Stagflation Takes Hold
A recession is imminent.
The Atlanta Fed's GDPNOW model - forecasting US economic growth - just downgraded its estimate of Q1 2025 GDP growth (or lack of it) from +2.3% to -1.5%.
After recent releases from the US Bureau of Economic Analysis and the US Census Bureau, the nowcast of the contribution of net exports to first-quarter real GDP growth fell from -0.41 percentage points to -3.70 percentage points while the nowcast of first-quarter real personal consumption expenditures growth fell from 2.3 percent to 1.3 percent.
Put a different way, spending less on transsexual Guinea pigs in Bora Bora means US GDP gets hit.
It does make us wonder how a 'model' of economic growth can swing 380bps into contraction from trend growth in a week... but hey, propagandists gonna propaganda.
Who could have seen this coming?
BELOW:
And here is Mizuho's Dominic Konstam just yesterday confirming the narrative perfectly.
DoGE-led recession risk?
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Here's the bigger play at hand, and why there is only token pushback to DOGE.
You cut enough spending - even if it's all grift and fraud - you eventually get a recession, guaranteed. That's all Congress is waiting for, because then they use the "emergency" to vote through a far greater spending package, ("will someone please think of all the unemployed"), one which eclipses all of DOGE's spending cuts.
What Musk is doing in trying to streamline the government is admirable, but ultimately it will be Congress that decides the endgame. There, things are as status quo as always.
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The market is focused on a negative economic fall out from Federal spending cuts. The level of potential Federal job losses are too small to derail growth but overall government spending has been egregiously high in recent years. There has also been excessive job growth in the “government+” sectors, including federal, state and local government and in education and health. If DoGE sets a precedent on jobs and achieves spending cuts that ricochet through the quasi-public sector, it is likely that new economic headwinds will develop.
The Fed is not cutting rates anytime soon but that restrictive policy stance bodes well for inflation containment. There are clearly still “seasonal” related bumps in inflation, but we are a far cry from any trend rise in inflation. We remain confident that the disinflationary process is intact, more so with the Fed on hold.
The real focus is on what kind of “new” economic order is in store for the global economy. We lay out a framework for Trump 2.0 that rests on two key principles: rebalancing trade and lowering rates. We see a tariff regime with different dollar outcomes as juxtaposed to a more cordial Bretton Woods 2 (BW2)/ Mar-a-Lago accord that overlays new (global) fiscal priorities and includes the debt-for-security swap. We show that market pricing is not too far off assigning a relatively large weight to a tariff outcome with stronger dollar. With growth headwinds the Fed will be able to get-off-pause, easing once disinflation resumes.
The curve has retained much of its steepness despite the belly more recently driving curve direction (bullish flattening/bear steepening 210s). We think the recent flattening “relief” reflects an appropriate repricing against the bear steepening fears initially triggered around Trump 2.0. Our yield curve analysis in the context of likely net supply outcomes and Fed reaction do allow for further curve re-steepening but only bullishly, on a sustained basis. Net supply alone doesn’t (bearishly) steepen the curve much. A proper bear steepening with the Fed priced not to cut much, requires a shift higher in Fed expectations. This in turn would likely need to reflect rising inflation expectations and a Fed unwilling to hike. At least for the Powell Fed this seems unlikely, in our view.
Our preferred view is that we will get more tariffs with a strong dollar. Despite the headline rhetoric, the effective tariff rate is still likely to be diluted (closer to 10 than 30 percent, that’s what reciprocity means!) – the one-off price impact is less than otherwise. With growth headwinds mounting, we think investors should accumulate duration on yield set back with the curve still being pressured flatter. Come q2 we expect this to segue into bullish steepening on resumed disinflation.
February was an absolute shitshow for macro data with inflation surprising to the upside and growth drastically surprising to the downside. Put together, they form the Fed's nemesis - Stagflation!
All of which could be seen as good news for Trump: he can impose tariffs (inflation) AND the Fed will be forced to cut rates (growth).
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GDP Q4 - INFLATION WORRIES
GDP (2ND EST): Q4 GDP 2nd estimates was unrevised at 2.3% (exp. 2.3%), while the deflator was revised up to 2.4% from the expected and prior figure of 2.2%.
The report adds that the move higher in real GDP largely reflected increases in consumer and government spending that outweighed a decrease in investment.
Headline PCE Prices Prelim rose 2.4% (prev. 2.3%) and the Core saw an upward revision, now at 2.7% (exp. 2.5%, prev. 2.5%), adding to growing concerns over accelerating inflation.
Friday's focus remains on inflation with January's core PCE report due, with monthly change expected to rise to 0.3% (prev. 0.2%) with yearly seen printing 2.6% (prev. 2.8%). Elsewhere within the report, sales and spending remained at 3.2% and 4.2%, respectively.
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JANUARY CORE PCE
Core M/M came in at 0.3% or 0.2847% unrounded (exp. 0.3%, prev. 0.2%), while Y/Y was 2.6% (exp. 2.6%, prev. 2.9%). The 6-month annualised rate climbed to 2.5% (prev. 2.3%), while the 3-month annualised rate was unchanged at 2.2%.
- Capital Economics notes that favourable base effects mean downward progress on core inflation is likely to continue over the next few months, before it is cut short when some combination of Trump’s reciprocal and wider tariffs come into effect.
- Elsewhere, Personal income rose 0.9% (exp. 0.3%, prev. 0.4%). Adj. consumption eased 0.2% (exp. 0.1%, prev. 0.8%), while real consumption declined 0.5% (prev. +0.5%).
- With the inflation rate still too hot for the Fed’s liking and, with inflationary tariff measures pilling up, Capital Economics stand by its view that rate cuts are off the table this year.
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GLOBAL
WHAT DOES YOUR SCAN OF THE DATA BELOW TELL YOU? - THE MEDIA AVOIDS BAD NEWS!
We present the data in a way you can quickly see what is happening.
THIS WEEK WE SAW
Exp. =Expectations, Prev. =Previous
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UNITED STATES
- US Dallas Fed Manufacturing Business Index (Feb) -8.3 (Prev. 14.1)
- US Consumer Confidence (Feb) 98.3 vs. Exp. 102.5 (Prev. 104.1)
- US Rich Fed Comp. Index (Feb) 6.0 (Prev. -4.0)
- US Rich Fed Mfg Shipments (Feb) 12.0 (Prev. -9.0)
- US Rich Fed, Services Index (Feb) 11.0 (Prev. 4.0)
- US CaseShiller 20 MM SA (Dec) 0.5% vs. Exp. 0.3% (Prev. 0.4%)
- US CaseShiller 20 YY NSA (Dec) 4.5% vs. Exp. 4.4% (Prev. 4.3%)
- US Monthly Home Price YY (Dec) 4.7% (Prev. 4.2%, Rev. 4.5%)
- US Build Permits Number (Jan) 1.473M (Prev. 1.483M)
- US New Home Sales-Units (Jan) 0.657M vs. Exp. 0.68M (Prev. 0.698M, Rev. 0.734M)
- US GDP 2nd Estimate (Q4) 2.3% vs. Exp. 2.3% (Prev. 2.3%)
- US Core PCE Prices Prelim (Q4) 2.7% vs. Exp. 2.5% (Prev. 2.5%)
- US Durable Goods (Jan) 3.1% vs. Exp. 2.0% (Prev. -2.2%, Rev. -1.8%)
- US Pending Sales Change MM (Jan) -4.6% vs. Exp. -1.3% (Prev. -5.5%, Rev. -4.1%)
- US Initial Jobless Claims 242k vs. Exp. 221k (Prev. 219k, Rev. 220k)
- US Continued Jobless Claims 1.862M vs. Exp. 1.872M (Prev. 1.869M, Rev. 1.867M)
- US KC Fed Manufacturing (Feb) -13.0 (Prev. -9.0)
- US KC Fed Composite Index (Feb) -5.0 (Prev. -5.0)
JAPAN
- Japanese Services PPI (Jan) 3.10% vs Exp. 3.10% (Prev. 2.90%, Rev. 3.00%)
- Tokyo CPI YY (Feb) 2.9% vs. Exp. 3.3% (Prev. 3.4%)
- Tokyo CPI Ex. Fresh Food YY (Feb) 2.2% vs. Exp. 2.3% (Prev. 2.5%)
- Tokyo CPI Ex. Fresh Food & Energy YY (Feb) 1.9% vs. Exp. 2.0% (Prev. 1.9%)
- Japanese Industrial Production MM SA (Jan P) -1.1% vs. Exp. -1.2% (Prev. -0.2%)
- Japanese Retail Sales YY (Jan) 3.9% vs. Exp. 4.0% (Prev. 3.7%, Rev. 3.5%)
AUSTRALIA
- Australian Weighted CPI YY (Jan) 2.50% vs. Exp. 2.50% (Prev. 2.50%)
- Australian Annual Trimmed Mean CPI YY (Jan) 2.80% (Prev. 2.70%)
- Australian Construction Work Done (Q4) 0.5% vs. Exp. 1.0% (Prev. 1.6%)
- Australian Capital Expenditure (Q4) -0.2% vs. Exp. 0.8% (Prev. 1.1%)
- Australian Private Capital Expenditure for 2025-26 (AUD)(Estimate 1) 148.0B
- Australian Private Capital Expenditure for 2024-25 (AUD)(Estimate 5) 183.4B (Prev. 178.2B)
NEW ZEALAND
- New Zealand ANZ Business Confidence (Feb) 58.4 (Prev. 54.4)
- New Zealand ANZ Activity Outlook (Feb) 45.1 (Prev. 45.8)
SOUTH AFRICA
- South African CPI MM (Jan) 0.3% vs. Exp. 0.3% (Prev. 0.1%); YY (Jan) 3.2% vs. Exp. 3.3% (Prev. 3.0%)
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EU
- EU HICP Final MM (Jan) -0.3% vs. Exp. -0.3% (Prev. 0.4%); HICP Final YY (Jan) 2.5% vs. Exp. 2.5% (Prev. 2.5%); HICP-X F&E Final YY (Jan) 2.7% vs. Exp. 2.7% (Prev. 2.7%); HICP-X F,E,A&T Final YY (Jan) 2.7% vs. Exp. 2.7% (Prev. 2.7%); HICP-X F, E, A, T Final MM (Jan) -0.9% vs. Exp. -1.0% (Prev. -1.0%)
- ECB Euro Area Indicator of Negotiated Wage Rates (Q4) 4.12% (prev. 5.43%)
- EU Economic Sentiment (Feb) 96.3 vs. Exp. 96.0 (Prev. 95.2, Rev. 95.3)
- EU Services Sentiment (Feb) 6.2 vs. Exp. 6.8 (Prev. 6.6, Rev. 6.7)
- EU Consumer Confidence Final (Feb) -13.6 vs. Exp. -13.6 (Prev. -13.6)
- EU Industrial Sentiment (Feb) -11.4 vs. Exp. -12.0 (Prev. -12.9, Rev. -12.7)
GERMANY
- German Ifo Business Climate New (Feb) 85.2 vs. Exp. 85.8 (Prev. 85.1);
- German Ifo Expectations (Feb) 85.4 vs. Exp. 85.0 (Prev. 84.2)
- German Ifo Current Conditions (Feb) 85.0 vs. Exp. 86.3 (Prev. 86.1)
- German Ifo Business Climate (Feb) 85.2 vs. Exp. 85.8 (Prev. 85.1)
- German GDP Detailed QQ SA (Q4) -0.2% vs. Exp. -0.2% (Prev. -0.2%); YY NSA (Q4) -0.4% vs. Exp. -0.4% (Prev. -0.4%)
- German GfK Consumer Sentiment (Mar) -24.7 vs. Exp. -21.4 (Prev. -22.4, Rev. -22.6)
- German State CPIs: Y/Y & M/M broadly in-line with German Mainland expectations of an unchanged Y/Y figure and a jump higher in M/M.
- German Retail Sales YY Real (Jan) 2.9% (Prev. 1.8%).
- German Import Prices MM (Jan) 1.1% vs. Exp. 0.7% (Prev. 0.4%); YY (Jan) 3.1% vs. Exp. 2.7% (Prev. 2.0%)
- German Unemployment Rate SA (Feb) 6.2% vs. Exp. 6.2% (Prev. 6.2%); Unemployment Change SA (Feb) 5.0k vs. Exp. 15.0k (Prev. 11.0k); Unemployment Total SA (Feb) 2.886M (Prev. 2.88M) ; Unemployment Total NSA (Feb) 2.989M (Prev. 2.993M)
FRANCE
- French Consumer Confidence (Feb) 93.0 vs. Exp. 93.0 (Prev. 92.0)
- French CPI (EU Norm) Prelim MM (Feb) 0.0% vs. Exp. 0.30% (Prev. -0.20%); YY (Feb) 0.9% vs. Exp. 1.2% (Prev. 1.8%)
ITALY
- Italian CPI (EU Norm) Prelim MM (Feb) 0.1% vs. Exp. 0.1% (Prev. -0.8%); CPI (EU Norm) Prelim YY * (Feb) 1.7% vs. Exp. 1.8% (Prev. 1.7%); Consumer Price Prelim YY (Feb) 1.7% vs. Exp. 1.7% (Prev. 1.5%); Consumer Price Prelim MM (Feb) 0.2% (Prev. 0.6%)
UK
-
UK Lloyds Business Barometer (Feb) 49 (Prev. 37)
- UK Nationwide House Price MM (Feb) 0.4% vs. Exp. 0.2% (Prev. 0.1%); YY (Feb) 3.9% vs. Exp. 3.4% (Prev. 4.1%)
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