Sell-Off Overdone?

The stock market will face two more data points this week that will offer an opportunity to see whether it overreacted to second-tier US economic data at the end of last week.  Consensus-like prints for the Conference Board's Consumer Confidence Index and the PCE Deflator could offer relief.   But any bounce-back may be impeded by concern over the March 1 deadline for Trump's decision regarding 25% tariffs on Canada and Mexico and the April 1 deadline regarding tariffs on several major goods.   Overall, Trump's pronouncements and policies are creating a troublesome backdrop for the market.

The market will likely pay close attention to the February Conference Board's Consumer Confidence Index to see if it confirms the drop in the University of Michigan Consumer Sentiment Index.  Consensus looks for a modest decline to 102.1 from 104.1 in January, after it dropped 5 points in January.  A consensus-like print still may provide relief, as it would remain in the range seen in 2024.  The Conference Board measure is viewed as more closely related to the labor market than is the Michigan Sentiment Index.  Although government layoffs could hurt the Conference Board measure either directly by laid off workers who are surveyed or by impacting others' views of the labor market, the Unemployment Claims data don't indicate a significant deterioration in labor market conditions.

From the Fed's perspective, the most important data last week was likely the University of Michigan's 5-Year Inflation Expectations.  It jumped to 3.5%, it highest level since 1995.  It throws into doubt Powell's long-maintained contention that inflation expectations are contained.  Higher food prices and fear of tariffs were likely behind the jump.  This week, the release of the January PCE Deflator could assuage market concerns, as consensus looks for +0.3% m/m  Core.  If correct, the y/y for Core should fall to 2.6-2.7% from 2.8% in December.  The Conference Board Consumer Confidence Survey also includes 12-month inflation expectations.  It rose to 5.3% in January from 5.1% in December.

There could be some relief if Trump delays tariffs on Canada and Mexico again.  The FX market appears to believe this will be the case, as the Canadian dollar and Mexican Peso are off their recent lows.  Trump set April 1 as a possible time to announce tariffs on some goods, such as motor vehicles and pharmaceuticals.  A tariff on motor vehicles may not be necessarily bad for US auto makers.  It would allow them to raise prices, probably more than making up for the  new tariff on steel and aluminum and the tariff applied to the vehicles they make in Mexico and Canada. 

That said, Trump's topsy-turvy views of the world have increased uncertainty regarding the future.  This uncertainty could hurt current economic activity.  Besides forcing companies to rethink their supply channels (and the accompanying increased costs) to take account of possible tariffs, the potential drag on economic activity from them or a trade war could weigh on investment decisions.  The drop in the February Phil Fed Mfg Survey's measure of planned capital expenditures to its lowest level since November hints as such.  It may be too soon, however, to see a similar effect in this week's release of January Durable Goods Orders.  Consensus looks for a decent 0.4% m/m increase in Orders Ex Transportation, a larger increase than the 0.3% in December.