Markets are waiting for any retaliation announcements once the White House formally announces tariffs
Claims expected to remain favorable
ECB expected to be on hold until summer
BOJ expected to leave policy unchanged
Markets are waiting for any retaliation announcements once the White House formally announces tariffs — The markets are waiting to see what retaliation announcements may emerge once the White House formally announces the Trump tariffs on steel and aluminum. The EU has already floated a list of products that may be subject to retaliation. However, U.S. trading partners are holding their fire until they see the written details of the tariffs.
The White House on Wednesday said that Canada and Mexico may be excluded from the steel and aluminum tariffs on national security grounds and that other countries may be excluded as well.
White House spokesperson Sarah Sanders on Wednesday said that the tariff announcement would be made by the “end of the week.” Reports later emerged that the tariff announcement may be made Thursday afternoon.
Claims expected to remain favorable — The initial unemployment claims series last week fell by -10,000 to a new 48-1/2 year low of 210,000, which means that layoffs in the U.S. economy are at their lowest level since 1969. Meanwhile, the continuing claims series is only +63,000 above the 44-year low of 1.66 million posted in November. The consensus is for today’s report to show a +10,000 gain to 220,000 in initial claims (after last week’s -10,000 decline to 210,000) and a -12,000 decline in continuing claims to 1.919 million (reversing part of last week’s +57,000 rise to 1.931 million).
On the labor front, the market is mainly looking ahead to Friday’s Feb unemployment report. The consensus is for Feb payrolls to show a +200,000 increase, matching Jan’s increase and coming in stronger than the 12-month trend average of +179,000. Wednesday’s Feb ADP jobs report showed a strong increase of +235,000, which was stronger than market expectations of +200,000 and supported expectations for a strong payroll report on Friday.
Meanwhile, the consensus is for Friday’s Feb unemployment rate to fall by -0.1 point to a new 17-year low of 4.0%. The expected unemployment rate of 4.0% would be below the Fed’s forecast of 4.1% for 2018-19 and would be substantially below the Fed’s estimate of a long-run natural rate of unemployment of 4.6%. The tight labor market in theory should be placing more upward pressure on wages than has been seen thus far. Average hourly earnings in January did rise to an 8-3/4 year high of +2.9% y/y, but that series is expected to ease slightly to +2.8% in Friday’s report.
ECB expected to be on hold until summer — The ECB at its regular policy meeting today is expected to leave its monetary policy unchanged. The deposit rate is currently at -0.40% and the refinancing rate is at zero. The ECB has so far announced that its QE program of 30 billion euros per month will last through September.
The market is not expecting any major changes in the ECB’s guidance language today. The minutes of the last ECB meeting said that, “changes in communication were generally seen to be premature at this juncture, as inflation developments remained subdued despite the robust pace of economic expansion.”
The next significant change from the ECB is likely to be a shift in its guidance language to break the link between inflation and its QE program. That change could possibly occur at the June meeting. The ECB’s current language says that the QE program will continue “until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” The language needs to be adjusted so that the ECB can end its QE program later this year even if there is no significant rise in inflation.
The Eurozone CPI has been locked in the narrow range of 1.2-1.5% for the past year and the core CPI has been in the range of 0.9-1.2% since last April. Those inflation figures are well below the ECB’s target of just below 2%.
The ECB by summer will have to announce what it plans to do about its QE program, which is currently scheduled to end in September. The consensus is that the ECB will likely finish the program off with 15 billion euros per month of purchases in Q4. However, if the ECB turns more hawkish by summer, the ECB could end the program altogether in September with no further purchases. The market is not expecting the ECB to start raising interest rates until at least mid-2019.
BOJ expected to leave policy unchanged — The Bank of Japan at its policy meeting on Friday is expected to leave its policy unchanged. The BOJ is following a yield-curve control policy where it is targeting the 10-year JGB yield at zero (with a range of -0.1% to 0.1%), potentially allowing the size of its QE program to fluctuate somewhat. The nominal size of its annual QE program is currently 80 trillion yen.
BOJ Governor Kuroda recently caused a stir by saying that the BOJ may need to start thinking about exiting its policy around the time of the 2019 fiscal year that begins in April 2019. That comment caused a jump in the yen and the 10-year JGB yield. However, Mr. Kuroda later clarified his statement to say that the BOJ will only need to start thinking about a tighter policy around fiscal 2019, not that the BOJ would actually start implementing a tighter policy at that time.
The BOJ wants to keep its policy language as easy as possible at present to prevent any further yen strength that would hurt both stocks and the economy and also prevent inflation from rising towards the BOJ’s 2% target.