DOGE Impact on NFP and the UR

If the inflation target was a range of 2%-3%, rather than 2%, would people be freaking out as much? C’mon. Core PCE came in at 2.6%. Again, the war has not been won, but inflation is contained enough for the Fed to focus on other things for now unless legitimate inflation issues start popping back up.

The M2 supply of money has been increasing as deposits earn interest. But the money isn’t changing hands at a faster pace, which is the bigger driver of inflation. Money just sitting on the sidelines doesn’t create inflation. The M2 velocity of money graph is the one I will be watching this year.

In the face of benign inflation, weaker economic data, and an Eagles Super Bowl win, markets have added an additional cut this year and pushed the T10 back to 4.21%.

Last Week This Morning

• 10T: 4.21%
• 2T: 3.99%
  • The 2T broke 4% for the first time since October. This is good news for caps if it holds.
• SOFR: 4.36%
• Term SOFR: 4.33%
• Durable Goods m/m: 3.1% vs 2.0% expected
• PCE Inflation Data
  • Core PCE m/m: 0.3% as expected
  • Core PCE y/y: 2.6% as expected
• Fed Speeches
  • Fed Barkin: “It makes sense to stay modestly restrictive until we are more confident inflation is returning to our 2% target”
  • Fed Harker: “The policy rate remains restrictive enough to continue putting downward pressure on inflation over the longer term, as we need it to, while not negatively impacting the rest of the economy”
• Citi mistakenly credited a customer’s account with $81T. In an unrelated story, both the Brooklyn and Golden Gate bridges have been painted in Eagles green.

The Tariff Vacuum

The Atlanta Fed GDPNow forecast for Q1 GDP peaked at nearly 4% in early February, but last week’s update fell off a cliff to -1.5%. That’s right – contraction. It fell from 4% to -1.5% in one month. Gulp.

What gives? Tariffs.

Mexico and Canada 25% tariffs kick in this week, and Trump has promised an additional 10% on China (which would bring the average to 32%). All the build up in inventories late last year ahead of the tariffs caused GDP to artificially spike, and now the opposite is happening as firms draw down on inventories rather than buy new goods. That directly impacts GDP.

We tend to view tariffs in an inflationary vacuum, but that’s not reality. Behaviors adjust, many of which translate into a weaker economy and less demand rather than higher inflation.

Jobs

This should be the month we see the impact of Trump’s focus on downsizing the government. Last year’s average monthly payroll would have been 132k if recent policies had been in place. The consensus forecast for Friday’s NFP is 160k, up from last month’s 143k, while the UR is expected to hold steady at 4.1%.

I think there’s a chance for a big miss. I won’t be surprised if NFP comes in under 100k.

While the DOGE layoffs are making the headlines, they aren’t even really driving the data yet. Any weakness in Friday’s report will be more impacted by spending freezes and uncertainty. In other words, the DOGE impact isn’t really even being felt yet.

I ran some numbers on the impact the DOGE game plan will have on the labor market this year.

The consensus forecast for DOGE layoffs is 300k. Assuming these are spread out evenly over 12 months and holding all else equal:

• Monthly NFP would drop by 25k
• UR would increase to 4.3%

But there are two contractors for every federal employee, which means the total layoffs could approach 1mm.

• Monthly NFP would drop by 83k
• UR would increase to 4.7%

It won’t play out like that, but it helps to provide some context around how big of a shock to the labor market this might be. While federal employees comprise just 1.5% of the total workforce, these sort of policies tend to ripple through to state and local governments as well.

Bloomberg noted last week, “Almost one-third of US workers are concerned about getting laid off by their employers” and “Among younger and older cohorts — employees age 18 to 35 and those age 56 to 65 — concern about losing jobs was the highest in at least two years.” ¹

Some other warm and fuzzies from that consumer survey:

• 43.8% are cutting discretionary spending
• 19.8% are borrowing from friends and family
• 14.4% took an additional job (the biggest spike since the creation of the survey)
• Among those making $150k+, 15.5% took out money from a retirement account

Real personal spending contracted last month, - 0.5%. This was +0.5% in the prior month.

All the uncertainty is causing consumers to grip tighter as they come under increasing strain. DOGE layoffs could serve like a classic exogenous economic shock and the Fed will need to balance that against the last mile of inflation.

I will be interested to see how much economic pain Trump will tolerate. Maybe he’s focused on pulling the pain forward to this year so next year can be focused on wining the midterms.

But everyone’s a tough guy until people start losing jobs.

Rates

Since the Eagles won the Super Bowl…

• the T2 broke 4% for the first time since October
• the T10 is approaching the December bottom of 4.15%
• the Fed started talking about winding down QT, which will alleviate some of that upward pressure on yields

There’s not a lot of technical resistance between 4.21% and 3.99%. Just like the T10 took off to 4.21% when it broke 4%, it could do the same falling back to 4%.

I’m at the point now where I don’t know if that’s a good thing or a bad thing for transactions. Does that make it easier to pencil or do sellers hold off hoping for another run to 3.6%?

The Week Ahead

Obviously, Friday’s jobs report is the main economic event, but tariffs will likely dominate headlines. Also, this is the last week for the Fed to massage market expectations ahead of their dark period next week. I can’t imagine they say anything newsworthy with so much uncertainty swirling, but it’s something to keep an eye on.