Macro questions and market strength

Episode Summary

Executive Summary: Goldman Sachs economists said the Trump administration’s early policy moves have raised uncertainty, but not materially changed their 2025 macro outlook. They still see about 2.5% U.S. growth, moderating inflation, and only a delayed path to Fed cuts, while markets are adjusting to a more complicated mix of tariffs, stronger yields, and a still-resilient dollar.

Main Topics: Tariffs and Trump policy uncertainty (Priority: 5/5): Jan Hatsias argued that tariff risks are higher and more uncertain than in November, with less focus on China and more on other trade measures, but said the overall macro picture has not changed dramatically. Inflation outlook and the January effect (Priority: 5/5): The speakers dismissed the hotter January inflation prints as largely seasonal and said the Fed’s preferred core PCE measure should remain consistent with gradual disinflation. Market pricing and asset resilience (Priority: 4/5): Dom Wilson said markets have become more complicated to trade because good growth, Fed caution, and tariff uncertainty are now all priced together, making the baseline friendlier but less clear-cut. Dollar strength and tariff tail risk (Priority: 4/5): Both speakers saw the dollar as supported by U.S. growth outperformance and tariff risk, though much of that strength is already priced, making further upside more dependent on severe trade escalation. Equity market durability (Priority: 4/5): Despite policy uncertainty and higher yields, equities remain near highs because growth and earnings are solid and tail risks have not yet materialized in full. Interest rates, financial conditions, and Fed policy (Priority: 4/5): They emphasized that high yields are less concerning than overall financial conditions, which remain accommodative; the Fed can stay patient while growth holds up. Data quality and economic measurement (Priority: 3/5): Hatsias warned that payroll data have become less reliable due to immigration measurement issues and changing labor-force dynamics, increasing the importance of broader labor indicators.

Key Arguments: The administration’s policies may push the effective U.S. tariff rate higher than previously assumed, possibly by 4-7 percentage points, but this is still not enough to overturn the broader growth/inflation outlook. Inflation data were not alarming on the Fed’s preferred measure; core PCE should still show a benign monthly pace after seasonal January distortions. Markets have shifted from debating whether growth will improve to pricing in that improvement, which makes risk assets more resilient but also more fully valued. The dollar remains attractive because U.S. outperformance and tariff risk support it, but a major further move likely requires a more severe tariff outcome than is currently priced. Broad-based tariffs on major trading partners would likely hurt equities in both the U.S. and abroad, while the yield curve could initially invert as near-term inflation rises but growth expectations weaken later. High 10-year yields are not automatically a problem if they reflect stronger growth rather than inflation shock and if the Fed remains able to cut in response to a real slowdown. Consumers remain supported by rising real wages, solid employment gains, and real disposable income growth, underpinning roughly 2.5% GDP growth. Payrolls are less useful as a single labor-market guide because the break-even employment rate is uncertain and immigration data are hard to measure in real time.

Data Points: U.S. growth forecast: about 2.5% - Goldman Sachs maintains its 2025 U.S. growth outlook despite tariff uncertainty. Core PCE inflation forecast: about 2.5% by year-end - They expect disinflation to continue, with core PCE easing to around target-adjacent levels. Effective U.S. tariff rate increase: 4-7 percentage points - Hatsias said the tariff impact could be somewhat larger than previously estimated. Prior tariff estimate: about 3 percentage points - Their earlier baseline assumption for the increase in the effective tariff rate. January core PCE monthly pace: 0.3% (30 bps) - Estimated monthly reading expected to be in line with or slightly below prior expectations. Recent core PCE monthly readings: 11 bps in November; 16 bps in December - Used to illustrate that January would still be a relatively benign inflation pace even if higher. 10-year Treasury yield: above 4.5% - Markets have kept long rates elevated and volatile, but without obvious economic damage so far. Policy rate: above 4% - The Fed funds rate remains above most estimates of neutral, yet cuts may still be delayed rather than canceled. Unemployment rate: about 4% - Part of the rationale for Fed patience, since labor markets remain stable. Employment growth: close to 200,000 average over the last 3-6 months - Supports the view that labor-market conditions remain solid. Real disposable personal income growth: 2.5% - Supports consumer spending and overall GDP growth. Consumer spending growth assumption: 2.5% - Derived from income growth and stable saving behavior. China and Europe equity performance: up more than 10% - Illustrates room for relief in non-U.S. markets when worst-case tariff outcomes do not materialize. Previous payroll break-even rate: about 70,000 per month - Pre-pandemic benchmark now viewed as less reliable. Current payroll break-even estimate: about 150,000, falling steeply - Current estimate due to immigration measurement uncertainty. Potential future payroll break-even range: 50,000-100,000 - Expected if net immigration stabilizes at a very low level.

Pivotal Quotes: "I would still answer it exactly the same way, both in the sense that I think the tailwinds are probably going to trump the tariffs." — Jan Hatsias: On whether the 2025 outlook has changed after the Trump administration’s early policy announcements. "What we've seen is essentially as those risks or the deep risks don't appear, markets are finding room to relax in places around that." — Dominic Wilson: Explaining why equities have stayed resilient despite policy uncertainty and higher rates. "I would look more at overall financial conditions probably than just the level of interest rates." — Jan Hatsias: On whether 10-year yields above 4.5% are a problem for the economy.

Implications: Listeners should expect slower Fed easing, continued tariff-driven volatility, and a still-supportive but less cheap market backdrop. The key risks are broad trade escalation and data noise, while the base case remains moderate growth, easing inflation, and resilient risk assets.