Trade Fears Trump Macroeconomic Factors

The potential for a trade war, with Trump's "shock treatment" of $60 Bn in tariffs on Chinese goods and appointment of hawks to the Administration, has pushed macroeconomic factors into the background temporarily.  How this confrontation evolves will determine the near-term direction of the markets.   And, the risk is that the confrontation will worsen before it gets resolved. 

To be sure, the rhetoric so far has been restrained and could alleviate some of the fears in the market immediately ahead.  US officials, including the new National Security Advisor Bolton, say they are not looking to spark a trade war, but see it as a way to get the Chinese attention and push them to better adhere to existing trade agreements.  The Chinese imposition of $3 Bn in tariffs against US goods is modest, but some reports say they were in response to the earlier US steel/aluminum tariffs and not the new tariffs directed at China.  So, while recent comments by Chinese officials are cautious, the risk is that they will announce new tariffs at some point -- at least to establish a better bargaining position in the event of negotiations.  This would be a negative for the stock market.  But, since the US tariffs will not go into effect for at least 45 days (15 days to publish a list of goods and then a 30-day comment period), such an announcement would not be the end of the story.   Negotiations and resolution of the issues are still in the mutual interests of both parties.  At some point, a stock market sell-off may very well be seen as a buying opportunity.

Upcoming US economic data are not likely to change expectations for a gradual tightening in Fed monetary policy.   Next week's calendar is light, with the February Core PCE Deflator on Thursday the most important.  The consensus estimate of 0.2% m/m is reasonable, but whether the y/y edges up to 1.6%, as consensus expects, or stays at 1.5% depends on rounding.  In the following week, March Payrolls may come in below the early consensus of +200k m/m, if last year's pattern holds.  Similarly, a consensus-like dip in the Unemployment Rate to 4.0% from 4.1% would be consistent with what occurred last year.  There is no consensus yet on March Average Hourly Earnings, but calendar considerations raise the risk of a high 0.3% m/m.  The y/y would rise to 2.7-2.8% from 2.6% in January.   Although this would be in line with the (downward-revised) 2.8% in January and 2.7% increase seen over 2017, a high print could spook the stock market as it did in January -- even though both would have been due to technical reasons.