Fiscal & Monetary Policy Collide

The Macro Institute's Weekly Economic Primer

Author

The Macro Institute
March 17, 2025

We’re kicking off March data today with the NY Fed’s Empire Index (regional PMI) and NAHB homebuilder sentiment - a first pulse check on the economy this month. Another key regional PMI, the Philly Fed Index, follows on Thursday.

The real spotlight this week will be on Wednesday’s Fed meeting. No major moves are expected, but the Q&A session will be crucial. Investors will be listening closely for any hints on how the Fed plans to tackle tariffs and their inflationary impact.

Housing data is also front and center this week. Existing home sales are released Thursday, but before that, building permits and housing starts land on Tuesday. Expectations? Tempered. Last week’s Michigan Sentiment Survey didn’t exactly paint a rosy housing picture, which makes a meaningful rebound in starts unlikely. Typically, we first see sentiment improve, which leads to more buyer traffic, and then the homebuilder ramp up starts. This week is probably not the turning point.

Stay tuned - plenty of signals to parse!

The Macro Week In Review

The Macro Specialist Designation (M2 SD)

The Macro Week Ahead

📊 The Wins, Winds & Whims of Fiscal Policy

The ongoing tit-for-tat on tariffs continues to escalate across major developed markets, making it a challenge to keep up with daily developments. This uncertainty suggests corporate revenue and earnings forecasts for 2025 and 2026 will have a wide margin of deviation. Reflecting this volatility, the S&P 500 briefly hit correction territory on Thursday before rebounding nearly 2.0% by midday Friday.

Supporters of tariffs highlight recent concessions from Mexico and Canada on border security and point to Honda’s decision to move Civic hybrid production (2028) to the U.S. instead of Mexico to avoid tariffs. While these may be “wins” for the administration, they don’t necessarily translate into near-term economic growth - the primary driver of the S&P 500’s trend.

Critics argue that tariffs disrupt trade flows, increase costs for businesses, and ultimately force consumers to absorb price hikes. This, in turn, can slow consumer spending and corporate capital expenditures, creating headwinds for the business cycle. The market impact is clear: the index measuring fiscal policy uncertainty has surged to levels last seen during the pandemic. For now, traders are at the whims of tariff-related headlines. Until financial markets receive clarity on the administration’s long-term policy, volatility is likely to persist.

📉 Assessing the Wreckage

As of midday Friday, the S&P 500 was down 2.6% for the week and 7.0% over the past month. Consumer Cyclicals, given their tariff exposure, have taken the hardest hit:

  • Discretionary (XLY): 🔻 -12.4%

  • Retail (XRT): 🔻 -14.3%

  • Amazon: 🔻 -13.7%

  • Tesla: 🔻 -25.9%

We’re also seeing an unwinding of 2024’s factor and strategy trends:

  • Momentum (MTUM): 🔻 -10.7%

  • High Beta (SPHB): 🔻 -11.4%

On the flip side, risk-off strategies have provided some cushion since early March:

  • Long-end bond ETF (TLT): +3.4%

  • Short-end bond ETF (SHY): +0.68%

  • Gold: +10.7% over last three months

Defensive sectors like Utilities, REITs, and Healthcare have outperformed on a relative basis, though they remain slightly negative.

📆 March Madness: Economic Data & Market Sentiment

While many will be filling out their NCAA brackets on Monday morning, we’ll be analyzing the first economic data releases for March. The key question: is the post-election bump in survey data signaling a broader cyclical recovery, or has it already faded?

Key Reports to Watch:

📉 Empire Manufacturing (Monday, 8:30 AM)

  • Expected: -2.0 (vs. previous 5.7)

  • This report is volatile, but the trend has been improving since early 2024.

🏡 NAHB Housing Market Index

  • Housing demand remains weak. Leading indicators, such as the University of Michigan’s “Good Time to Buy a House” survey and the Housing Affordability Index, signal continued struggles for new construction and home sales.

💳 Retail Sales (February)

  • A strong retail sales number could challenge the “growth scare” narrative.

  • Johnson Redbook Retail Sales Index: +5.7% (week of 3/7) suggests the consumer economy remains resilient.

  • University of Michigan Consumer Sentiment (March): 57.9 (↓5 pts from February)

    • Sentiment is highly divided by political lines:

      • Republicans: 83.9

      • Democrats: 41.4 (even lower than pandemic levels)

🏦 FOMC Rate Decision: A Balancing Act

On Wednesday, the Federal Reserve will announce its latest interest rate decision. The market assigns a near-zero probability of a rate cut this meeting, but all eyes will be on Chairman Powell’s press conference. He faces a delicate balancing act, addressing:

Key Fed Challenges:
1. Market expectations for rate cuts by June
2. Inflationary impacts from tariffs
3. Concerns over slowing growth
4. Consumer inflation expectations hovering at 3 - 4%
5. A solid labor market

We expect Powell to highlight last week’s modest step down in CPI and emphasize that rent disinflation is coming through the pipeline. He will likely reiterate the Fed’s patient stance, emphasizing that the FOMC does not overreact to a single month’s data.

While Fed policy often comes under criticism, navigating this economic landscape is no easy task.

🚀 Final Thoughts

Market volatility remains high, driven by uncertainty over tariffs, economic data, and Fed policy. While risk-off assets have provided some shelter, equity markets are unlikely to stabilize until we get greater clarity on fiscal and monetary policy.

As we navigate these shifting winds, the key question remains:
👉 Will economic momentum hold, or are we at the start of a deeper slowdown?

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