April 8, 2025

Macrofinancial Outlook for the Day

Releases

NFIB Optimism Index

March 2025: Small Business Optimism Declined Below Its 51-Year Average Level As Uncertainty Led Business Owners To Scale Back Expectations. According to the NFIB, “The NFIB Small Business Optimism Index declined by 3.3 points in March to 97.4, falling just below the 51-year average of 98. The Uncertainty Index decreased eight points from February’s second highest reading to 96. ‘The implementation of new policy priorities has heightened the level of uncertainty among small business owners over the past few months.’ said NFIB Chief Economist Bill Dunkelberg. ‘Small business owners have scaled back expectations on sales growth as they better understand how these rearrangements might impact them.’” [NFIB, 2025-04-08]

March 2025: The Net Percentage Of Small Business Owners Expecting Better Conditions Fell For The Third Consecutive Month, And By The Most Since December 2020. According to the NFIB, “The net percent of owners expecting better business conditions fell 16 points from February to a net 21% (seasonally adjusted). This is the third consecutive monthly decline and the largest monthly decline since December 2020.” [NFIB, 2025-04-08]

March 2025: After Surging Following The Election, The Net Percentage Of Small Business Owners Expecting Higher Sales Volumes Fell For The Third Consecutive Month. According to the NFIB, “The net percent of owners expecting higher real sales volumes fell 11 points from February to a net 3% (seasonally adjusted). This is the third consecutive month real sales expectations declined after surging from recession levels after the election.” [NFIB, 2025-04-08]

March 2025: As Small Business Expectations Of Higher Selling Prices Remained Elevated, The Highest Number In A Year Planned Price Hikes. According to the NFIB, “The net percent of owners raising average selling prices fell six points from February to a net 26% seasonally adjusted. This is the largest monthly decrease since December 2022, but still historically high. Seasonally adjusted, a net 30% plan price hikes in March, up one point from February and the highest reading since March 2024.” [NFIB, 2025-04-08]

March 2025: Small Businesses Reported Tightening Credit Conditions With Loans Being Harder To Get And More Important To Business Functions. According to the NFIB, “A net 6% reported their last loan was harder to get than in previous attempts, up four points from February and the largest monthly increase since September 2023. Twenty-eight percent of all owners reported borrowing on a regular basis, up four points from February’s lowest reading since May 2022.” [NFIB, 2025-04-08]

Context

Small businesses owners are a critical component of the Trump coalition. This has been borne out in NFIB surveys, with the spike following the election being one of the largest on record. The March report was collected before the “Liberation Day” tariffs were announced, and as a result, it is likely that the next report will show another steep drop in confidence.

Tariff Response

Bloomberg Economics: Trump’s Tariffs Could See A 3 Percent Drop In Output And A 1.5 Percent Boost In Inflation. According to Bloomberg, “The results show that a historic tariff hike is set to have a historic impact. The measures announced by Trump on April 2 will take the average tax rate on US imports from 2% all the way up to about 22%. Plugging that increase into the Fed’s model shows a reduction in US gross domestic product of almost 3% and a boost to inflation of about 1.5%. This toxic combination, which economists call stagflation, will likely play out over two to three years. Europe’s exports to the US could drop 40%; China’s might fall up to 80%. Will Apple Inc.’s ‘designed in California, made in China’ business model survive? What about Walmart Inc.’s supply chain? I guess we”ll find out.” [Bloomberg, 2025-04-08]

Corporate Debt

More than the stock market decline, the increase in uncertainty caused an increase in the risk premium less than stellar borrowers will have to pay. While the spread relative to treasuries understates the difficulty these firms are facing (given the strangeness in Treasury markets as detailed below), it is still telling. Moody’s defines Baa rated firms as “subject to moderate credit risk,” but they are still investment grade. These are not weak firms, but, facing higher funding costs, they face a higher hurdle rate to invest or hire.

“Credit Volitility Is Back,” As Corporate Debt Sales Ground To A Halt Following Trump’s Tariff Announcements Due To “Crippling Policy Uncertainty”. According to Bloomberg, “Company debt sales have ground to a halt in the US as markets across the globe show increasing fear of President Donald Trump’s escalating trade war triggering a global recession. A $1.1 billion leveraged loan sale that was meant to help finance HIG Capital LLC’s purchase of Canadian firm Converge Technology Solutions Corp., was put on pause, according to people with knowledge of the matter. In the commercial mortgage bond market, Brookfield delayed a $2.4 billion refinancing package for a Hawaiian mall and office complex, citing volatility as the market saw its biggest two-day price decline since March 2020 on Friday. No new US investment-grade bonds have been issued since Wednesday morning, before Trump announced his sweeping tariffs. There are eight issuers that held investor calls and have still yet been able to sell debt. Transactions on riskier debt are being pulled or postponed, while measures of perceived risk for high-grade and high-yield US corporate bonds are flashing a warning sign. Across Europe, investors are dumping risky assets, especially those tied to the auto industry. ‘Credit volatility is back,’ Deutsche Bank strategists led by Steve Caprio wrote in a note Monday. ‘Crippling policy uncertainty, haphazard tariff rate calculations, a partial loss of confidence in US institutional norms and rising inflation are all notably increasing US risks.’” [Bloomberg, 2025-04-07]

Treasury Weakness

WSJ Headline: Stocks Are In Turmoil, But Treasury Yields Are Stubbornly High. [Wall Street Journal, 2025-04-08]

Despite The Rapid Market Selloff, Treasury Yields Did Not Fall As Much As Anticipated According to the Wall Street Journal, “The stock market has been the acute point of stress for investors the past week. But the bond market hasn’t given them much of a break either. On Monday, when stocks were tumbling for a third straight day, prices of long-term U.S. Treasury debt fell, too. That drove their yields, which move in an inverse relationship to prices, higher. It was especially confounding because long-term Treasury prices in preceding days hadn’t gained as much as they normally would in the face of a steep-stock market selloff. So much for government debt being a haven at a time of upheaval. The big question is why Treasury yields have behaved this way.” [Wall Street Journal, 2025-04-08]

• Stagflationary Fears Complicate The Appeal Of Treasuries As Hedges. According to the Wall Street Journal, “The answer may be that bond traders are reflexively pricing in the simplest scenario—a short-term economic shock followed by a rapid return to the status quo. Bonds are also being pulled in two different directions: fears of a recession are mounting, but tariffs raise the prospect of higher or stickier inflation.” [Wall Street Journal, 2025-04-08]

• Foreign Investors Pulling Money Out Of The United States Could Complicate The Appeal Of Treasuries. According to the Wall Street Journal, “There are probably other forces at play. Some investors are likely rotating out of bonds to buy the equity dip, or to go into cash. The recent fall in the U.S. dollar may indicate that foreigners in particular are pulling out, and there is also anticipation of new Treasury issuances this month. The scariest possibility is that markets are becoming concerned about the government’s ability to refinance $37 trillion of public debt. The U.S. budget deficit is already above 6% of gross domestic product, and a recession would widen it further by lowering tax revenues and raising unemployment benefits.” [Wall Street Journal, 2025-04-08]

In A World Where The Dollar Is Expected To Weaken, The Cost Of Hedging Against Dollar Exposure Brings Treasury Yields Below That Of European And Japanese Bonds. According to Bloomberg, “In the first rush for safe havens in years, global investors are finding there are credible alternatives to US Treasury bonds. Yields on the benchmark 10-year Treasury have tumbled about 40 basis points this year, briefly falling below 4% in the past couple of days on President Donald Trump’s barrage of tariffs that economists say raise the risk of a recession. In contrast, comparable rates in both Europe and Japan — which have also tumbled amid the risk aversion — remain up this year. In Germany, the 10-year bund at 2.66% reflects the prospect of a flood of bond issuance as the government ramps up defense spending. Meanwhile, the rate on 10-year Japanese bonds has soared after spending years around zero and is now around 1.25% as investors brace for tighter monetary policy there. While both are still well below Treasury yields, they’re at levels that makes them look more attractive than Treasuries to European and Japanese investors who hedge their dollar exposure when buying US securities. That might entice investors to shift allocations to their home markets, where the policy outlook appears more stable.” [Bloomberg, 2025-04-08]

• Unstable Policies Pursued By The Trump Administration Could Further Diminish The Appeal Of Treasuries. According to Bloomberg, “Meanwhile, US policy under Trump looks less stable, potentially eroding the appeal of Treasuries. Besides his trade war, Trump has upended domestic politics by undertaking an effort to dramatically shrink the federal government and he’s alienated long-time allies by expressing his desire to acquire the Panama Canal, Greenland and Canada.” [Bloomberg, 2025-04-08]

April 2025: An Auction Of $58 Billion Of Three Year Treasuries Drew “Lackluster Demand.” According to Bloomberg, “An early test arrived Tuesday with the sale of $58 billion of three-year securities that attracted lackluster demand. Treasury yields ticked higher, notably in the long end, after the auction, with the market focused on sales of 10- and 30-year maturities due in the next two trading sessions.” [Bloomberg, 2025-04-08]

Foreign Demand For Treasuries Has Skewed Towards Longer Matiturities, Meaning A Pullback Could Lead To A Steepening Yield Curve. According to Bloomberg, “Traditionally, the US’s budget deficit has been financed in part by a wave of capital from across the world seeking exposure to Treasuries. All in, foreign ownership of US Treasuries amounts to about a third of the market, while the foreign sector was the largest source of US bond demand last year, according to a Barclays Plc analysis of fund flow data. That reflected net buying of $910 billion, about half of which was in Treasuries, they said. Crucially, the vast majority of foreign Treasury holdings are in longer maturities, according to US government data. That means as foreign demand dissipates, it can steepen the US yield curve, said Ales Koutny, head of international rates at Vanguard, meaning long-term rates rise relative to short-term ones.” [Bloomberg, 2025-04-08]

Basis Trade Blowup? A Threat To Liquidity

April 7, 2025: Treasuries Sold Off Sharply As The 10 Year Yield Jumped More Than On Any Day Since September 2022, While The 30 Year Jumped The Most Since March 2020. According to the Financial Times, “US government debt sold off sharply on Monday as hedge funds cut back on risk in their strategies and investors continued shifting into cash during a third day of acute tumult on Wall Street. The benchmark 10-year Treasury yield jumped 0.19 percentage points on Monday to 4.18 per cent, the biggest daily rise since September 2022, according to Bloomberg data. The 30-year yield jumped 0.21 percentage points, the biggest move since March 2020. Yields rise when prices fall.” [Financial Times, 2025-04-08]

• Investors And Analysts Pointed At “Basis Trade,” Where Leveraged Investors Exploit Price Differences Between Futures And Treasuries As A Possible Source Of These Sales. According to the Financial Times, “Market participants said the declines in the $29tn Treasury market on Monday reflected several factors, including hedge funds cutting down on leverage — or borrowing used to magnify trades — and a broader dash for cash as investors sheltered from swings in the wider market. Gennadiy Goldberg at TD Securities said the move reflected ‘an “everything, everywhere all at once”-type trade’. He added: ‘Multisector funds are trying to deleverage, which leads to a “sell everything” trade.’ Investors and analysts pointed in particular to hedge funds that took advantage of small differences in the price of Treasuries and associated futures contracts, known as the ‘basis trade’. These funds, which are large players in the fixed-income market, unwound those positions as they cut back on risk, prompting selling in Treasuries. ‘Hedge funds have been liquidating US Treasury basis trades furiously,’ said one hedge fund manager.” [Financial Times, 2025-04-08]

• With The Market Panic, Investors Exploited Treasury Market Liquidity, Thereby Diminishing It. According to the Financial Times, “‘The simplest explanation (for the move in yields) is investors selling what they can and hunkering down. Selling equities now will lock in losses so the lowest-hanging fruit is to raise cash by selling Treasuries,’ said Al-Hussainy. The hedge fund manager who attributed the moves in yields to the basis trade said the scale of the broader hedge fund selling was ‘destroying’ liquidity — or the ability to easily buy and sell assets — across Treasuries, high-grade corporate bonds and mortgage-backed securities. ‘There’s massive deleveraging going on, any source of liquidity is being tapped,’ the person said.” [Financial Times, 2025-04-08]

Oil Prices

Goldman Sachs Revised Their Oil Price Forecasts With Prices Falling To $55, And An Outside Shot Of Falling To $40. According to Bloomberg, “Goldman Sachs Group Inc. — fresh from cutting oil forecaststwice in a week — said Brent has the outside potential to fall below $40 a barrel under ‘extreme’ outcomes as the trade war flares and supplies rise. ‘In a more extreme and less likely scenario with both a global GDP slowdown and a full unwind of OPEC+ cuts, which would discipline non-OPEC supply, we estimate that Brent would fall just under $40 a barrel in late 2026,’ analysts including Yulia Grigsby said in an April 7 note. That view does not represent the bank’s current base-case outlook, which has Brent at $55 next December.” [Bloomberg, 2024-04-08]

Price Increases

April 2025: Levi Strauss CEO Michelle Glass Was Confident In “Pricing Power.” According to the Wall Street Journal, “Levi CEO Michelle Gass said the company will be ‘surgical’ with any price hikes on its iconic jeans rather than making across-the-board changes in response to tariffs. The company has created a task force to look at tariffs mitigation strategies, including cost cutting, wringing concessions from suppliers and price increases to consumers. ‘We believe the brand has pricing power,’ Gass said. Levi Strauss makes many of its products in Asian countries subject to high tariffs, such as Bangladesh, Cambodia and Vietnam. But it has already imported most of the products it needs for spring and summer seasons and only 1% of the products it imports to the U.S. are made in China, which faces the highest tariff rate.” [Wall Street Journal, 2025-04-08]

Bloomberg Headline: Apple iPhone Price Hikes Are Now Looking Possible In The US. [Bloomberg, 2025-04-06]

Higher Building Materials Could Raise Home Insurance Prices

Before Trump’s Tariff Announcement, Home Insurance Rates Were Already Scheduled To Increase By 8 Percent In 2025. According to Bloomberg, “With the Los Angeles fires in January and last week’s severe storms that brought flooding and tornadoes to the Midwest, extreme weather is already battering US homes in 2025. Homeowners should expect their insurance rates to jump accordingly, says Insurify, an insurance policy comparison website, in a new report. The steep tariffs imposed by President Donald Trump will likely worsen the pain. The average annual cost of home insurance will increase 8% nationally by the end of the year to $3,520 for a home worth $400,000, Insurify projects. Some states, including Louisiana, Iowa and Minnesota, will see double-digit increases.” [Bloomberg, 2025-04-08]

• During The Shipping Disruption In The Pandemic, Home Insurance Rates Went Up As Homebuilders Struggled With Imported Materials. According to Bloomberg, “US homebuilders and contractors import materials from tariff-hit countries such as China, Canada, Mexico, Japan and Vietnam. “These barriers will impact the construction industry’s supply chain,” Brannon said. The last time that happened, during the Covid-19 pandemic, the price of insurance was affected.” [Bloomberg, 2025-04-08]

Government Spending

April 2025: The Trump Administration Boosted Medicare Payment Rates By Twice As Much As The Biden Administration Had Proposed, Boosting Health Insurer Share Prices. According to the Wall Street Journal, “Health insurer stocks soared on Tuesday because the Trump administration said it would substantially increase payment rates for Medicare insurers next year, generating more than $25 billion in additional revenue for the industry and doubling the boost proposed in January. The news led to a rally in the shares of big Medicare insurers such as UnitedHealth Group, Humana and CVS Health, parent of Aetna. Shares in UnitedHealth rose 8% in morning trading, while Humana was up more than 11% and CVS increased 9.5%. The rate increase of 5.06%, compared with 2.23% in the earlier proposal from the Biden administration, overshot even optimistic expectations from many Wall Street analysts. […] Investors likely viewed the bump as a sign of the Trump administration’s support for Medicare Advantage, the program under which private insurers administer the benefits of the federal program for older and disabled Americans.” [Wall Street Journal, 2025-04-08]

Outlook

During the pandemic, state unemployment systems were overwhelmed by the number of claims. As a result, many people were unable to get the benefits they were entitled to, and that made the first part of the pandemic much harder for them. That is why, the Biden administration’s DOL endorsed a state-by-state refresh of the IT systems that ran these programs.

Yesterday I noted that the changes the Trump administration has made to Social Security has led to a decline in the program’s reliability. If, as many indicators now suggest, the economy begins to decline, that will make it a lot more difficult for people to get the benefits they are entitled to, especially if they are currently delaying those benefits.

There are many reasons people could be delaying benefits today. If you are able to wait, you will receive higher benefits, and many Americans have been in a position to wait. Buoyant financial markets and strong employment have made it possible for older Americans to remain in the workforce, or live off of their savings without the need for Social Security. Unfortunately, both of those things can change quickly, and as a result, the Social Security administration could be in for a rush of claims, just as they are unable to process the claims they have right now.