Fixed Income Briefing March 2025

Economic and US Treasury Market Review

• The US Federal Reserve, as expected, kept rates on hold again in March at 4.25-4.50%. However the Fed’s statement added an acknowledgement of increased uncertainty. The message was very much a “wait and see” approach. Although the statement no longer mentioned “balanced risks to employment and inflation goals”, Chair Powell clarified that this does not signal a change in policy guidance. The Fed’s GDP growth expectations were revised down to 1.7% from 2.1%. Core PCE forecasts rose from 2.5% to 2.8% but remained unchanged in 2026 at 2.2%. Unemployment was revised to rise from 4.3% to 4.4%. Although Fed Chair Jerome Powell stated that the impact from tariffs are likely to be transitory, St Louis Fed President Alberto Musalem has said it’s not clear the impact of tariffs will prove temporary, and cautioned that secondary effects could prompt officials to hold interest rates steady for longer. The Fed also kept two rate cuts, totaling 50 bps, in their updated summary of economic projections for 2025. However,the Fed is expected to hold rates at its next meeting on 6-7 May with its next cut not likely to happen before its June meeting at the earliest.
• The dollar index has been down again in March and is approximately -2.70% MTD. The dollar has continued to fall due to weakening economic data and uncertainty over US tariffs implementation and retaliatory measures.
• The US labour market moderated in February with the NFP increasing by 151,000 in February after upward revisions to the prior two months. The unemployment rate edged up to 4.1% in February from 4% in January. The labour participation rate edged down to 62.4%; it is still below the pre-pandemic level of 63.3%. The underemployment rate rose to 8.0% in February from 7.5% in January to its highest level since 2021. Average hourly earnings were up 4.0% y/o/y. Inflation eased to 2.8% in February 2025 from 3% in January with headline CPI rising by 0.2% m/o/m, down from January’s 0.5%, while core CPI, excluding food and energy, was up by 0.2% m/o/m, up from January’s 0.4%. Headline CPI came in at 2.8% y/o/y, down from January’s 3%, and core CPI came in at 3.1%, the lowest reading since April 2021.
• On the growth front March Flash PMIs showed the US economy still performing, but confidence falling. The Flash Composite PMI in March came in 53.5, up from February’s 51.6 and a 3-month high. The Flash Services PMI came in at 54.3, up from February’s 51.0 and also a 3-month high. However, the Flash Manufacturing PMI came in at 49.8, down from February’s 52.7 and a 3-month low. As noted by S&P, business expectations for the year ahead fell to their second lowest since October 2022 as companies grew increasingly cautious about the economic outlook, often citing worries over customer demand and the impact of aspects of the new administration's policies.

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