2/7/25: Positive Economic Data Supports US Economic Outlook

Against a backdrop of predominantly positive economic data this week, Treasury yields remain at the lower end of the year-to-date range, supportive of a constructive outlook for the US economy in 2025. Early in the week, the ISM Manufacturing Index surprised to the upside, coming in at 50.9, the first time the index was in expansionary territory since October 2022. The underlying constituents of the manufacturing index were also positive, all above 50 and above the prior month’s readings. The Job Openings and Labor Turnover Survey (JOLTS) was released on Tuesday and indicated potential upcoming softness in the labor market with the Job Openings rate declining to 4.5%, compared to the prior months 4.9%. Although the JOLTS series is historically volatile, the declining jobs opening rate synchs up with elevated continuing jobless claims, a data point the Chandler team continues to monitor closely. ADP employment was released on Wednesday, and although the series does not garner the same market impact as the monthly payrolls report, the underlying data on year-over-year wage growth is informative. Notably, the ‘job-stayers’ annual wage increase of 4.7% as of January 2025 compares favorably to the January 2024 annual increase of 5.3%. The annual wage increase of ‘job-changers’ saw a more material year-over-year change, coming in at 6.8% as of January 2025 compared to 7.7% as of January 2024 – we think this is another data point on a slowly cooling labor market with ‘job changers’ obtaining lower annual wage increases. The ISM Services Index was also released on Wednesday, and although the number remains in expansionary territory at 52.8 the number was lower than the prior months 54.0.

The January payrolls report was released this morning with the headline number of 143k job gains below the consensus estimate of 175k, however the elevated upward revisions to the prior months pushed up the three-month moving average on payroll gains to a strong 237k. Wage growth firmed, with average hourly earnings on a month-over-month basis 0.5%, keeping the annual wage growth number for the series at 4.1%. The Chandler team is calling for annual wage growth to trends towards 3.0 to 3.5% in 2025, today’s average hourly earnings data in isolation is inconsistent with our thesis. Other notable developments linked to the inflation and interest rate outlook since last Friday were more constructive, including both the tariff announcements and the US Treasury’s quarterly refunding announcement. Regarding tariffs and illustrating the transactional nature of the new Presidential Administration, the 25% tariffs imposed on Mexico and Canada over the weekend were postponed by one month on Monday after President Claudia Sheinbaum of Mexico and Prime Minister Justin Trudeau of Canada both pledged to increase support to reinforce the southern and northern borders, respectively, after conversations with the Trump administration. On Wednesday, the US Treasury quarterly refunding announcement indicated no change to issuance well into 2025, allaying market concerns around increased issuance in longer maturity Treasury yields. Market participants will demand a higher term premium for increased issuance in longer maturity tenors. With Treasury Secretary Scott Bessent’s on record criticism of the prior administration’s reliance on Treasury Bills to fund the deficit, the unchanged announcement on the refunding plans helped to solidify current valuations further out the yield curve for the time being.

The Chandler team continues to forecast a further steepening of the Treasury yield curve between two-year and ten-year Treasury notes in 2025. Although the Treasury curve was flatter on a week-over-week basis, with ten-year Treasury notes declining by 4 basis points to 4.50% offset by the 8 basis point increase in two-year Treasury notes to 4.28%, we believe the steepening theme will reassert itself later in the quarter as inflation metrics gradually cool towards the Federal Reserve’s 2% objective. Expectations around the trajectory of monetary policy remain volatile, however the Chandler team continues to forecast a reduction in the Fed Funds rate in the first half of 2025. In our view, curve steepening needs to be led by shorter maturity Treasury notes, implying the market’s expectations around the trajectory of monetary policy are too bearish currently.

Next week: Consumer Price Index, Producer Price Index, Retail Sales, Industrial Production, and Capacity Utilization

© 2025 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.