Stocks should continue to rally this week, as the Fed reaffirms its gradual tightening policy and view of a strong economy in Powell's Semi-Annual Monetary Policy Testimony (Tuesday and Wednesday). Corporate earnings continue to beat expectations, and headline risks translate into volatility.
It's anybody's guess how the trade war salvos will evolve. An auto tariff deal with Europe and conciliation with Mexico and Canada seem doable near term. Issues regarding Chinese business practices would seem to require time to resolve, and, from a market perspective, fade into the background.
Meanwhile, the macroeconomic impacts of tariffs are playing out. The dollar has strengthened, helping to keep import prices and overall US inflation subdued. The stronger dollar and low inflation help keep the Fed on a gradual tightening path.
The tariff's impact on inflation is not clear. The dollar's restraining impact on inflation is more general than the narrow boost from tariffs. So, the extensiveness of the stronger dollar's impact may balance the large boost to a few items from the tariffs. Moreover, the impact of a stronger dollar is not easy to disentangle, in contrast to that of a tariff. The latter can be isolated in the data and dismissed as a relative price change.
The net effect of tariffs on real economic activity also is indeterminate, and GDP forecasts are likely to be little affected by them. On the positive side, the tariffs should help the protected domestic industries. Also, a gradual Fed supports overall economic growth. On the negative side, some industries will be hurt to the extent tariffs boost the prices of inputs. And, the stronger dollar is a negative for US exports and industries that face competition from imports. Most analysis of tariffs in the press leave out the effects of the tariffs on the dollar and Fed policy -- it is "partial equilibrium" rather than "general equilibrium" analysis.
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