PM
- Today’s Trump-Merkel meeting will be closely watched for any comments on trade or the euro
- Fed dots will be the key in 2-day FOMC meeting that begins today
- U.S. PPI expected to play some catch-up to CPI
Today’s Trump-Merkel meeting will be closely watched for any comments on trade or the euro — President Trump’s trade policy will be in focus this week with (1) today’s meeting at the White House between President Trump and German Chancellor Merkel, and (2) an expected Senate confirmation hearing today for Robert Lighthizer as Mr. Trump’s nominee for US Trade Representative (USTR).
The markets will also be watching to see how Treasury Secretary Mnuchin handles trade and currency issues at the G-20 meeting of finance ministers and central bankers this Friday and Saturday in Baden-Baden, Germany. The Trump administration is reportedly pushing for a focus on avoiding competitive devaluations to boost trade advantages, but it does not appear that Mr. Mnuchin plans to come out swinging at the G-20 meeting with any disruptive trade comments.
Trade will be a major topic at today’s Trump-Merkel meeting amid reports that Ms. Merkel will stress the benefits of free trade but will also raise the possibility of European retaliation if the Trump administration imposes an import tariff on European goods with the proposed border adjustment tax system. The markets will be watching to see if the meeting produces any pronouncements by Mr. Trump on European trade or on currency issues, or whether Mr. Trump will instead try to dial down the temperature a bit while Ms. Merkel is in town.
The markets received some encouragement on the trade front over the weekend when Steven Schwartzman, the chairman of Mr. Trump’s strategic and policy forum, said in a CNN interview that he does not think there are “going to be issues regarding China as a currency manipulator and some of the other things.”
The Trump administration has so far been relatively restrained on trade issues and has not done anything unexpected to alarm the markets. However, that could change once Mr. Trump’s trade team is fully in place. One area of concern is that Trump administration officials recently seem to have been testing the waters by questioning whether the U.S. could by-pass the WTO with trade complaints and remedies. The WTO provides the whole legal structure for world trade relations and disputes.
The Financial Times last Friday carried a story detailing the civil war on trade that has broken out in the White House between the economic nationalists such as senior advisor Steve Bannon and trade advisor Peter Navarro versus trade moderates led by National Economic Council Director Gary Cohn. Mr. Trump by nature seems to be aligned with the economic nationalists, but Mr. Trump also likes to see the stock market go up, which means he will also likely pay attention to more moderate trade advice from former Goldman Sachs president and COO Gary Cohn.
Fed dots will be the key in 2-day FOMC meeting that begins today — There is no doubt that the FOMC at its 2-day meeting that begins today will raise its funds rate target range by +25 bp to 0.75%-1.00% given the recent guidance by various Fed officials. Ms. Yellen on Friday, March 3, said that a rate hike at this week’s meeting “would likely be appropriate” if employment and inflation continue to “evolve in line with our expectations.”
With this week’s rate hike being a foregone conclusion, the markets are mainly trying to get a sense of how fast the Fed thinks it will need to raise interest rates over the next several years, assuming the economy cooperates. FOMC members in the past several weeks rather suddenly coalesced around the need for a rate hike at this week’s meeting, which suggested that Fed officials might be getting a little panicked about whether they have already fallen behind the curve in raising interest rates. The Fed has largely met its labor market and inflation goals and yet the current funds rate target of 0.50%-0.75% is far below the 3.00% funds rate target that the Fed sees as its longer-term goal.
Specifically, the markets will be watching to see whether the Fed tightens up its current Fed-dot projections for roughly three rate hikes per year over the coming three years. FOMC members in their last set of Fed dots released in December 2016 forecasted a median expectation of three rate hikes in 2017, producing a funds rate mid-point target of 1.4% by the end of 2017. The Fed dots then projected another three rate hikes in 2018 and three more rate hikes in 2019, resulting in a 2.9% funds rate by the end of 2019, nearly meeting the Fed’s longer-term forecast for the funds rate of 3.0%.
U.S. PPI expected to play some catch-up to CPI — The market is expecting today’s Feb final-demand PPI report to strengthen to +1.9% y/y from Jan’s +1.6% for the headline index and to +1.5% y/y from Jan’s +1.2% for the core index. The stronger PPI report would not be surprising given how it has been lagging the CPI and PCE deflator. The market consensus for Wednesday’s Feb CPI report is mixed with an expected rise in the headline CPI to +2.7% from Jan’s +2.5% but a slight decline in the core CPI to +2.2% from Jan’s +2.3%. The PCE deflator in January was more subdued at +1.9% y/y headline and +1.7% y/y core.
The U.S. inflation outlook in general remains relatively stable with support from the improving economy and higher wages. However, last week’s -9% plunge in oil prices will put some downward pressure on the headline inflation statistics, thus bringing them more into line with the core statistics. The 10-year breakeven inflation expectations rate is currently at 2.02%, in line with the Fed’s 2% inflation target.
