Porous Trump tariff announcement means U.S. trading partners may defer any retaliation announcements
Degree of labor market tightness in today’s U.S. unemployment report will drive Fed speculation
ECB stays on hold except for small guidance shift
Porous Trump tariff announcement means U.S. trading partners may defer any retaliation announcements — President Trump on Thursday afternoon announced his steel and aluminum import tariffs, but the program was so porous that U.S. trading partners may defer any retaliation announcements until they see whether they will actually be subject to the tariffs. Europe has already warned that it has a retaliation program ready with tariffs on $3.5 billion worth of U.S. exports.
China seems assured of being hit with the tariffs since Mr. Trump’s main criteria for exempting a country will be (1) the country’s security relationship with the U.S., and (2) whether that country treats the U.S. “fairly” on trade. However, Mr. Trump said that he would be “very flexible” about deciding which countries will be hit with the tariffs, leaving open the possibility that many countries could be exempted.
Mr. Trump specifically exempted Canada and Mexico from the tariffs until he decides how NAFTA negotiations are proceeding. Mr. Trump also spoke favorably about Australia. Europe and South Korea could also be excluded based on security ties, although Mr. Trump is not happy with Europe on trade.
Mr. Trump suggested that he will personally decide which countries will be hit with the tariff and what the actual tariff level will be for that country. Mr. Trump said he’s “sticking with 10 and 25 initially” and that “I’ll have the right to go up or down depending on the country, and I’ll have the right to drop out countries or add countries.”
Thursday’s news on the tariff embroglio was somewhat supportive for the markets. On the positive side, Mr. Trump was talked into exemptions and saw first-hand how much opposition there is to tariffs within his own party. Still, Mr. Trump also now realizes that tariffs provide him with a powerful weapon that he can use whip U.S. trading partners (and the markets) on an impromptu basis.
Degree of labor market tightness in today’s U.S. unemployment report will drive Fed speculation — The markets will key heavily on today’s Feb unemployment report since any signs of a tighter labor market and higher wages could encourage the Fed to go beyond its current forecast for three rate hikes in 2018. The markets are particularly worried about wage growth after Jan average hourly earnings rose to an 8-3/4 year high of +2.9% y/y.
The markets currently believe there is a 100% chance that the FOMC at its meeting in 1-1/2 weeks (Mar 20-21) will raise its funds rate by another +25 bp to 1.50-2.00%. The markets also suspect that some FOMC members at that meeting will raise their forecasts for the funds rate, thus producing an increase in the median forecast from its current level of three rate hikes (75 bp).
In any case, the consensus is for today’s Feb payroll report 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 jobs (vs expectations of +200,000) and the report supported expectations for a strong payroll report today.
Meanwhile, the consensus is for today’s Feb unemployment rate to fall by -0.1 point to a new 17-year low of 4.0%. Today’s 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. The markets are expecting today’s Feb average hourly earnings report to back off slightly to +2.8% y/y from the 8-3/4 year high of +2.9% y/y posted in January. The markets are expecting wages to cool a bit in February after the report in January saw some one-time boosts from calendar factors, bonuses, and minimum-wage hikes in parts of the country that took effect on Jan 1.
T-note prices are likely to take a significant hit if today’s Feb hourly earnings report happens to be stronger than expected at +3.0% y/y or above. A strong wage report would kick off a new round of speculation about whether the Fed will raise rates four times in 2018 rather than the expected three times.
ECB stays on hold except for small guidance shift — Bund yields rose on Thursday after the ECB shifted to more neutral guidance by dropping its phrase that the bank would increase the size of its QE program if necessary. However, the ECB on Thursday met market expectations by leaving in place the more important guidance language linking QE and inflation. 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 ECB by its June meeting is expected to sever the link between QE and inflation so that the ECB can end its QE program later this year even if there is no significant rise in inflation.
The ECB by late summer will then need to announce what it plans to do about its QE program, which is currently scheduled to end in September. The market consensus is that the ECB will finish the program off with 10-15 billion euros per month of purchases in Q4. However, the ECB could also take the more hawkish step of just ending 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.