Stock Market Hurdles This Week

Stocks could stabilize this week, as they might have already largely adjusted to the risk of additional tariffs on Chinese imports and apprehension of Thursday's August CPI report.  Apple's new product event on Wednesday may be a positive.

At this point, Trump seems to believe more pressure on the Chinese leadership is needed to change their policy regarding foreign investments in their country.   And, the US economy's strength, as seen in Friday's employment report, could mitigate any concern he might have of an untoward impact from tariffs.  So, an announcement of additional tariffs would appear to be a real risk.   This would not be the case if a meeting between Trump and Xi Jinping is announced for later in the month.  But, this may be a long shot, as Trump has insisted that Xi Jinping be willing to address changing his economic growth policies in order to have the meeting.  Although new tariffs would not go into effect immediately, their negative announcement impact on stocks could linger as Street economists lower their US GDP forecasts.

The hit to Real GDP Growth from a 25% tariff on $500 Bn of Chinese imports should be less than 1.0% pt, probably closer to 0.5% pt.  If the entire $125 Bn in tariffs is passed through to consumers and reduces spending dollar for dollar, 0.7% pt would be subtracted from y/y Real GDP Growth.  The spending reduction is likely to be less than dollar for dollar, though.   Some of the tariffs may not be passed through, and, to the extent they are, some could reduce saving rather than consumption.

There would be indirect effects, as well, the net effect is indeterminate.  A stronger dollar would hurt US net exports, which, in turn, could depress commodity prices.   The latter would be a positive for consumption, but also be a negative for domestic mining and oil production.  A stronger dollar and lower commodity prices would hurt emerging market countries, as well.  Slower growth could persuade the Fed to slow its path of tightening, a pro-growth positive. 

The consensus estimates of +0.3% m/m Total and +0.2% for August Core CPI look reasonable.  (Y/Y would dip to 2.7% from 2.9% for Total and be steady at 2.4% for Core.)   There still could be further pass-through of the tariffs in Household Appliance and New Vehicle prices and higher oil prices in Airline Fares.  Most other prices should be subdued.  It is of interest whether news accounts of a weakening in housing rent gets captured in the CPI.  Housing rent is calculated as a moving average in the CPI, so their shifts tend to come in gradually.

On Friday, the market reacted to the high 0.4% m/m increase in August Average Hourly Earnings.  AHE now has risen 0.3-0.4% m/m in 3 of the past 4 months.  And, the calendar favors another high print for September 2018.  A similarly sustained high wage inflation pace last occurred over September 2017-January 2018.  This pickup in wage inflation may not be fully passed through to prices, however, since productivity growth has sped up, as well.