CNR Speedometers^®

Welcome to the City National Rochdale March Speedometer® Update. I’m Charles Luke, Chief Investment Officer. Thank you for joining us. As we move into March, the Economic Outlook remains complex, marked by both positive and negative developments. Real-time measures of GDP indicate a slowdown in Q1, contrasting with a much stronger than expected Q4 earnings season in which corporate results have largely exceeded expectations.

The primary driver of market sentiment continues to be policy uncertainty with tariff threats now materializing into concrete actions. However, we still lack a full view of the broader policy landscape, with key areas such as deregulation, tax policy and the federal budget yet to take shape. This environment presents a more challenging backdrop as we assess the latest changes in economic indicators. In addition, while underlying strength in the economy does remain, the market has reacted negatively to the recent economic data, which reflects broader negative sentiment that has been building. And there’s no doubt that sentiment has been impacted by the now very real tariff threat as 25% tariffs on Canada and Mexico, and an additional 10% tariff on China, have gone into effect.

We’re continuing to assess the overall impact, but we do expect a rocky next few weeks. And, despite the environment, we have several changes to the Speedometers® this month.

Dial 1: Inflation, 1:23— First, we’ve taken our Inflation dial lower. Inflation pressures appear to be moderating with January’s strong consumer price index reading showing signs of being an outlier rather than the beginning of a sustained uptrend. Goods prices, which had been key drivers of disinflation, have remained stable, despite the tariff implementation.

And meanwhile, services inflation remains elevated, but is showing early signs of deceleration as well. The latest core PCU reading came in lower than expected, reinforcing the view that inflation is continuing its gradual path downward. But tariffs have the potential to put upward near-term pressure on inflation, and that’s the primary reason we’re downgrading our inflation outlook. The Fed remains on hold for now, and, while rate cuts are anticipated later in the year, policymakers are still closely monitoring price pressures.

Dial 2: Housing/Mortgage, 2:09— We’ve taken the Housing and Mortgage dial lower as well. The housing sector continues to weaken as mortgage rates remain elevated, home prices stay stubbornly high and affordability challenges persist. The National Association of Homebuilders Sentiment Index dropped again in February, and housing starts fell sharply in January. The residential sector is a notable drag on Q1 GDP, with residential investment tracking a significant contraction.

Additionally, new tariffs on construction materials, which include steel and aluminum, are likely to add cost pressures, further dampening homebuilder sentiment and housing affordability.

Dial 3: Geopolitical Dial, 2:43— The next dial we’ve made changes to is our Geopolitical dial, and we have moved that positive. The geopolitical landscape is shifting, with some development contributing positively to global stability, notably direct engagement between the U.S. and Russia. While controversial, it does signal a potential first step toward de-escalating tensions in Ukraine. In the Middle East, the situation remains fragile, but it has not worsened, with diplomatic efforts continuing. And these factors contribute to a slightly more constructive geopolitical backdrop, though risks do remain.

Dial 4: Political Environment, 3:13— We’ve also made an adjustment to our Political dial, and we’ve moved that positive. The political environment, while still highly uncertain, has seen some stabilization.

Corporate leaders have expressed increased confidence, particularly in light of potential deregulation and tax cuts that could support growth later in the year. While the full impact of proposed policy changes remains unclear, the reduced immediate political volatility, despite uncertain tariff policy, is providing some clarity to certain sectors of the economy.

Dial 5: Disposable Personal Income, 3:42— The last adjustment we made is to Disposable Personal Income, and we’ve moved that positive. Consumer income fundamentals remain resilient, with wage gains outpacing inflation in recent months. January’s personal income report showed a solid .9% increase, driven by strong wage growth, social security adjustments and dividend income. The rising savings rate, now at about 4.6%, suggests that consumers are building financial buffers, which could support spending later in the year. While consumer sentiment has weakened due to policy uncertainty and tariff concerns, the underlying income trends remain constructive for future consumption.

Despite a slowing economic momentum in Q1, the overall outlook remains mixed. Deterioration in the housing sector and real-time GDP measures indicate headwinds, but corporate fundamentals remain strong following a robust Q4 earning season. Policy uncertainty does continue to dominate market sentiment with tariff threats now becoming tangible realities. However, the full policy landscape has yet to emerge as deregulation, tax policy and the budget remain key unknowns.

Inflation is a wild card, but the trend is still positive. Meanwhile, political and geopolitical conditions have shown modest improvements, and consumer income trends remain supportive of long-term growth. So, as we move forward, the interplay of these factors will be critical in shaping the trajectory of the economy and markets in the months ahead.