April 2025 Commentary and Economic Outlook
- InfraCap Management
- 2 hours ago
- 5 min read
APRIL 2025 EDITION:
Commentary and Economic Outlook
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 | Top Headlines from Commentary and Economic Outlook: |
Headline CPI was negative at .1%, and core at positive .1% with Y/Y headline dropping to 2.4% and core to 2.8%. The cool print was driven by plunging oil prices and other volatile components including lodging, airline fares, and used cars. Shelter continued to be distorted with owners equivalent rent rising to .4% from .3% despite market rents continuing to rise only 1% per year.
We continue to be bullish on bonds with a 3.75% year-end yield target on the 10-year. The economy is slowing and weakness in the US job market will likely force the Fed to cut 3 times this year. The market had failed to recognize that tariffs are recessionary/deflationary as the tax revenue reduces the deficit and the price increases are one time and should be ignored by the Fed. We believe the latest sell off in Treasuries was technical and will return to normal over time.
We expect earnings season will be a positive catalyst for the market as companies provide details on how they will cope with tariff increases, although investment banks are likely to miss earnings estimates due to market turmoil. Tax Day could be a negative catalyst, however, as investors fund tax payments with stock sales.
THE MARKET IS IGNORING THE IMPACT ON INFLATION OF A 14% PLUNGE IN THE PRICE OF ENERGY. There is a 5% bleed through of energy prices to core inflation which could offset all or a part of the increase in import prices. Headline inflation could be negative over the next few months as lower energy and refined products prices feed through to inflation indices.
Energy is 6% of headline inflation (and 5% of PPI) so a 14% reduction in energy prices will trim CPI by almost 1% and will reduce core by up to 1% as lower energy prices bleed through to core slowly over time.
| Economics & Fed |
We do not expect a US recession as the economy is supported by the fact that the bond market has cut long-term rates for the Fed. Oil prices have dropped 14% this year and tech spending is likely to remain strong. Additionally, there is a pending $1.5tn tax cut currently being passed by congress.
Our estimate of PCE based on CPI is only .1%. Energy prices continued to plunge after the measurement period of March CPI, which means April headline inflation is likely to also print cool. CPI-R, our real time estimate of CPI, is only up 1.1% year-over-year. We continued to believe that the Fed is making a serious policy error by not cutting rates as inflation is clearly dropping rapidly and already below the Fed’s target if the 2-year lagged shelter estimate is corrected to use real time pricing of rents.
Price increases from tariffs should be treated as a one-time increase in prices and be ignored for the purpose of formulating monetary policy. The effect of new tariffs will be out of the inflation data after the next two months, which should allow the Fed to see that inflation is actually dropping due to ultra-tight monetary policy and plunging oil prices. We continue to believe that the Fed will cut 3 times this year and that the 10-year yield will end the year in the 3.5%-4.0% range after the Fed cuts rates.
The US economic growth is decelerating rapidly with growth likely to drop from over 3% into the 1-2% range as the effects of the Fed’s ultra-tight monetary policy impacts the residential and commercial construction industries and the deflationary/recessionary impacts of Trump Administration tariffs and DOGE layoffs impact the economy.
| Stock Market: |
We are neutral to negative on the stock market and have pulled our price targets pending more clarity on tariff war, tax bill and Fed policy.
Corporate tax cuts are the key driver of economic growth and stock prices. The IMF estimated that a 10% increase in country savings drives economic growth by 1.5%.
We expect the market to stabilize in mid-April after we get greater clarity on tariffs and income taxes and we enter earnings season. There will be substantial support for the stock market in the 5,000 area for the S&P.
The US is experiencing StagDeflation as growth decelerates and inflation continues to decline well below the Fed’s arbitrary 2% target. Tariff increases are one-time increases (as the Fed Chair acknowledged) and should be excluded from core inflation.
The Trump administration has made a policy error by leading with tariff tax increases well before we have visibility on the tax cut bill. This policy error has created uncertainty about the US economy and destabilized the stock market. The tariff policy has also frozen the Fed, which should be cutting rates now.
| Bond Market: |
We continue to be bullish on bonds with a 3.75% year-end yield target on the 10-year. The market has failed to recognize that the economy is slowing (see details below) and weakness in the US job market will likely force the Fed to cut 3 times this year. The market had failed to recognize that tariffs are recessionary/deflationary as the tax revenue reduces the deficit and the price increases are one time and should be ignored by the Fed.
Changes in 10-year treasury inflation break evens (ILBE on terminal) dropped by over .2% to 2.2% since the “Chart of Death” was unveiled by President Trump at the liberation day press conference.
Inflation is always caused by excessive money supply growth as occurred during the Pandemic (22% inflation with 22% excess money supply growth) and never by tariffs and deportation. The money supply (M0) shrank 5% Y/Y indicating that prices will continue to decline.
The “Hatfield Rule” is a recession indicator which states that if housing starts drop below 1.1MM there will be a recession. It is superior to the “Sahm” rule as housing is a leading indicator and employment is a lagging indicator.
| Commodities |
We are lowering our 2025 target on oil from $80 to $70 (range of $60-80) as it has become clear that Trump will use his influence with the Saudis and Russia to limit price increases despite tighter sanction on Iran. This policy will offset a good portion of one-time price increases from tariffs.
Pollution taxes are by far the most economic method to rapidly reduce carbon and improve the environment. Limiting natural gas production is highly destructive to the global environment and has led to regime change in Europe.
President Trump has indicated that he will pressure OPEC, particularly Saudi Arabia, to increase oil production and keep prices low. At the same time, Trump supports domestic drilling which is positive for U.S. production volumes. Therefore, companies with volume exposure have outperformed those with commodity price sensitivity. We have lowered our oil price target to $60 – 70 per barrel.
Artificial Intelligence and data centers have opened up new growth prospects for natural gas midstream companies to supply gas fired power plants. Natural gas plants have some of the shortest times to build and we believe they are best positioned to supply reliable power quickly.