Tariff Fears, the Fed and the February Employment Report

Fears of a trade war upended any post-Powell relief rally in stocks late last week.   But, since it is unclear whether Trump will actually follow through with the proposal as presented, these fears may abate somewhat for now.  Besides last week's stock market reaction, it is most likely that many of the companies that would be hurt by the tariffs have been pushing back through Congressional and Administration officials.  The threat of tariffs may devolve into trade negotiations with other countries, just as the battle of words between Trump and the North Korean president appears to be moving toward talks.  To be sure, if this scenario for tariffs does not materialize, stocks will likely drop again. 

Note that the Chinese Trade Balance for February will be released on Thursday night.  Consensus looks for a deficit, which may ease international trade fears although it probably reflects the timing of the Chinese New Year.

The markets' focus could quickly turn back to the Fed, with Friday's February Employment Report  the next key piece of evidence.  Consensus-like prints for Nonfarm Payrolls (+204k m/m),  the Unemployment Rate (-0.1% pt to 4.0%), and Average Hourly Earnings (+0.3% m/m) would keep alive fears of the "dots" showing 4 expected hikes this year, up from 3.  But, softer-than-consensus prints cannot be ruled out:

          a.  Payrolls may very well slow from January's 200k pace, perhaps to below the 192k 3-month average, as retail jobs resume their downtrend after seasonals likely overly boosted them in January.  Other Payroll components were trend-like in January.

          b.  The Unemployment Rate may not fall from 4.1%, because of rounding.  It was 4.148% in January, so a decline of less than 0.1% pt would round up to 4.1%.

          c.  AHE risks slowing to 0.1-0.2% m/m, after composition shifts may have boosted it to 0.3% in January.  The y/y would fall to 2.7-2.8% from 2.9%.

A Fed rate hike at the March 20-21 FOMC Meeting is highly likely even if the Employment Report is somewhat softer than consensus.  But, it is not certain that the "dots" will be boosted.  Current-quarter GDP forecasts could come down.  And, there is always the possibility the economy may moderate later in the year as the boost from the tax cut dissipates.  Ironically, the negative fall-out of tariffs throws some doubt into forecasts of continuing strength for the rest of the year.  It would seem the Fed could stick with its expectation of 3 hikes this year and wait a few months to decide whether another hike this year will be needed.