Stocks Range Bound?

The stock market may stay in a range near term, helped by some easing in the tariff situation but hurt by higher longer-term Treasury yields and weaker dollar.

The worst of the tariff situation may be over.  China has said it will not retaliate further.  And, headlines could turn market-positive as bi-lateral negotiations with other countries occur.  Also, the Administration's idea regarding natural gas exports could resolve the situation positively.  The next positive surprise could be if China and the US agree to talks to diffuse the issue.  However, until then the impact of the large tariff on Chinese goods remains to be seen. 

The sell-off in Treasuries and the dollar, however, could become a major problem for stocks.  It may show waning demand for US assets stemming from bad tariff policy by the US.  Or, it could result from higher inflation expectations, also stemming from the tariffs.  The latter is seen in the jump in 5-year inflation expectations in the University of Michigan Consumer Sentiment Survey to 4+% from the former 3% trend.  The jump in longer-term inflation expectations runs counter to the Fed's idea of a one-off impact of tariffs on prices.  The Fed may be forced to tighten at some point as a result of these market moves.

In contrast to these fears, the US economy so far remains solid with little inflation.  Unemployment Claims stayed low in early April.  Inflation also is not problematic.  Ironically, the low March CPI in part reflected large price cuts that might have resulted from a tariff-induced pullback in demand in -- airfares and hotel rates.  The direct boost from the tariffs is yet to be seen.  There is no reason from these fundamental data for the Fed to change its steady policy stance.

Here are some thoughts on the trade deficit and tariffs.

 Explaining the Trade Deficit -- Several Ideas

1.  Trump pushes this idea: The deficit results from unfair practices of US trading partners.  These include subsidizing exports, dumping products and manipulating currencies.  These practices should be addressed, but universal, high tariffs would seem to be excessive as the unfair practices are likely concentrated in only a few countries and can be addressed with more targeted policy tools.  

    a.  China is the major perpetrator.  Their actions stem in part from central planning, for which the typical result is overproduction relative to demand.  China dumps the excess supply onto the rest of the world, depressing prices and undercutting manufacturing in other countries.  Many economists have argued that China should boost its domestic demand, in part by structural changes. 

2.  Some economists blame the US for the deficit.  They say the deficit results from inadequate saving, that is excessive consumption, by the US.   Their argument is based on an identity in GDP accounting that equates national saving to the trade balance.  A trade deficit equates with a saving shortage.  There is almost a moral criticism in this explanation.

3.  A third explanation:  The deficits result from the desire of other countries to hold US dollars.  Financial inflows lift the dollar in the FX market, thereby hurting exports and boosting imports. Countries are willing to produce for the US in exchange for paper debt.  The deficits can be interpreted as compensation to the US for having a global currency with a dependable legal system behind it.  The current sell-off in Treasuries and dollar raise the possibility that this cause of the trade deficit is ending.

Trump's tariffs address the first two explanations.  The reciprocal tariffs are supposed to be geared to unfair trade-related actions of each country.  And, as a tax, they result in forced saving by the US.  Even if these are viewed as justifiable reasons to cut the trade deficit, the magnitude of the tariffs remains an issue.

If Trump viewed the trade deficit the third way, he'd likely see it as a good deal -- an exchange of paper for goods and services.

From the perspective of the third explanation, eliminating the trade deficit through tariffs could lead to a dollar shortage.  This would strengthen the dollar in the FX market, offsetting the impact of the tariffs and leading to a renewed US trade deficit.  However, it could result in other currencies playing a larger role in international trade and finance, pushing down demand for dollars and hurting the US position in the world economy.  The current weakness of the dollar in the FX market and increase in Treasury yields could be anticipatory of this scenario.

Is Elimination of the US Trade Deficit With Tariffs a Good Goal?  

1.  Good Goal:  Labor unions think so because fewer imports could shield them from competition with the global labor force. To be sure, although their members could bargain for higher wages, they would be hurt by higher prices on goods and services they consume as well as by a recession if precipitated by tariffs.  

2.  Good Goal: Cutting the trade deficit would slow the move of the US into being a net debtor.  By going into debt to the rest of the world, the US provides other countries with the means to buy US assets.  Part of US production then would go to foreigners as dividends, profits or interest.  The US would be working in part for others, not a good outcome.  However, foreign purchases of US assets could be controlled by Presidential or Congressional actions, so a general tariff may not be necessary.

3.  Good Goal: Re-shoring production could make the US less vulnerable in a political or military conflict.

Bad Effects of Eliminating the Trade Deficit With Tariffs

1.  The US standard of living will decline if the deficit is eliminated by cutting imports.  The standard of living had been propped up by the amount of the trade deficit, which represents the amount the country spent beyond its income.  

2.  The tariffs' role as a tax would be behind the decline in the standard of living.  

2.  Replacing the international supply nexus with a domestic system would be costly to implement.  

3.  Once implemented, a domestic system would be more costly to operate than the international supply nexus, otherwise it would have been in place already.

4.  The range of goods available to US consumers could shrink, as some goods become too expensive to market. 

 Exporting Natural Gas

1.  The Administration has raised the possibility of substituting other countries' purchases of US natural gas for tariffs as a way to eliminate the trade deficit.

2.   Boosting exports of natural gas instead of cutting imports by imposing tariffs would eliminate the tariff's bad effects.  And, it would boost US GDP. possibly with little strain on the labor market.

3.  It would eliminate the benefits from reducing foreign competition for unions and moving the US further into a net debtor position. 

4.  It would likely lift natural gas prices.

A Little Appreciated Benefit of the Trade Deficit

1. The aging US population means that more working-age people will be needed to support the country's standard of living.  Immigration is one solution.  However, Trump's anti-immigration policy closes that door.  Running a trade deficit allows the US to take advantage of working-age people abroad without incurring the costs associated with immigration. 

 

Trump Tariffs Still A Problem, But...

The stock market and other financial markets are setting up for their fears of what may stem from Trump's tariffs -- recession and the costs of major shifts in the global economy.  However, it will take time to determine how the fall-out from the tariffs plays out, as discussed below.  So, the market sell-off may become excessive if the worst of the fears don't happen, and some recovery near term is possible.  This week's release of the March CPI could help, as it risks being soft (consensus is 0.1% m/m Total and 0.3% Core, which can't be ruled out but risks being too high).  To be sure, an end of the sell-off may require the stock market to overshoot and hit an important support level.  Or, the market may find relief if there is movement by countries to negotiate with the US. 

1.  Tariffs as a Tax on the Consumer

Expectation of a recession stems from the role of tariffs as a tax on the consumer.  Assuming full pass-through of the tariffs to prices and no change in spending composition, Trump's tariffs would cut consumers' purchasing power by $1Tn per year, including the tariffs on steel, aluminum and autos, according to news services.   This represents about 3.5% of GDP, making it the largest tax hike relative to GDP since 1942 .   

The drop in Real GDP would be less under some scenarios.  /1/ If people reduce their saving rather than spend and pay the higher prices.  /2/ If people shift the composition of their spending toward domestically-produced goods and away from imports.  /3/ Other countries cut their exports or their prices to the US.

2.  Prices of Domestically-Produced Goods

The drop in Real GDP could be worse if domestic producers lift their prices, taking advantage of weakened competition from imports.  Price hikes by domestic producers would eliminate the ability of consumers to avoid paying the tariffs by shifting the composition of their spending.  The hikes by themselves would cut consumer purchasing power (and boost the companies' profits), as well.  So far, however, a couple of domestic auto companies have cut prices temporarily.  One auto company is holding prices steady at this point.  

3.  Shift in Demand to Domestic Producers

A shift to domestically-produced goods, as apparently some auto companies have begun to do, not only could allow consumers to avoid paying the tariff, it would boost GDP.  At the extreme, there would not be a recession but instead stronger economic growth.  The problem then would be that the increased domestic production would have to displace other domestic production if the economy is operating near full capacity (as it is now).   In particular, demand for labor could climb and exert upward pressure on wage inflation.  Higher interest rates, weaker stocks and higher inflation are ways the markets would accomplish the "crowding out."  When the economy is operating at full employment, the eventual outcome would be the same level of GDP as what would have been the case without the tariffs, but the composition of output would differ.

4.  Retaliation

Some countries already have responded to the tariffs by imposing their own.  Anger at the US reportedly has prompted Canadians to cancel travel to the US, which is a reduction in US services exports, and to impose tariffs on some US motor vehicles.   China is about to impose tariffs on US goods.  It also has retaliated by limiting sales of rare earth minerals.  The next shoe to drop could be the European Union, although some European countries (eg Italy and Ireland) appear to be arguing against or for modest retaliation.  Vietnam appears to be moving in that direction, as it has offered to drop all its tariffs on US goods.  Note that dropping its tariffs may not be enough to placate Trump -- Vietnam controls its currency and may be holding it down relative to the dollar.

5.  Price Inflation

There are several ways that tariffs could precipitate higher price inflation.  /1/ A pass-through of the tariffs, /2/ matching price hikes by domestic producers, /3/ shortages created by other countries'  retaliatory actions,  and /4/ higher wage inflation resulting from increased demand for labor or from a push by labor to catch up to the higher prices.  

These channels may take time to work through.  So, inflation measures, like the CPI and PCE Deflator, could have high prints for a number of months, even if the pass-through is one-off as the Fed thinks is likely.  A full pass-through of the tariffs would boost the PCE Deflator by 5%.  Wage inflation will be important to watch.  A speedup in wages would suggest that a "wage-price spiral" is a more likely consequence of the tariffs than the one-off idea.

6.  Fed Policy

The Fed will eventually cut rates to fight recession, but may be slow to do so while inflation stays high.  The Fed would manage both issues well by first letting the economy weaken and unemployment rise and then easing to end the recession.  Creating labor market slack initially would allow the economy to resume growing without boosting inflation.

7.  Fiscal Policy

Trump may be hoping that an extension of his earlier tax cuts will offset the drag from tariffs.  However, the extension shouldn't be viewed in the way done by the Congressional Budget Office (CBO).  The CBO measures it against a baseline where the tax cuts are allowed to expire.  Doing so, CBO estimates the extension would cost $4.6 Tn over 10 years.  This is the 10-year sum, not the annual amount.  In terms of offsetting the tariffs, however, it is the sequential change that matters.  And, a simple extension would add zero sequentially.  So, it would not offset the drag from tariffs.

 

 

Fear of Fall-Out from Trump Tariffs

The stock market may continue to be fearful of the fall-out from Trump's tariffs, with the big announcement of reciprocal tariffs on April 2.  At this point, the fear is that economic growth and corporate earnings will be hurt, while inflation will speed up.   This week's key US economic data may be viewed as too early to indicate any tariff effects.  The market may get clarity on individual company impacts during the Q125 earnings season in April. 

Overall, Trump's intention appears to be to bring manufacturing production back to the US from abroad.  While the economy is operating close to full capacity, this result would likely be accomplished through a shift in resource allocation rather than by higher-than-otherwise overall activity.  To some extent, cutbacks in government jobs and spending free up resources for this purpose.  The markets could move in ways to accomplish it, as well.  For example, higher interest rates would depress construction activity and higher prices would depress consumption.  At the end, overall GDP would be about the same but the composition different.

The 25% auto/truck tariff may not hurt domestic motor vehicle manufacturers as much as feared.  They would capture market share as sales shift from imports to their less expensive cars and trucks.  Raising prices could help profits, as well, but it would have to be balanced against losing unit sales as a a result.  This could be an important restraint on price hikes, as the "price elasticity" of vehicle demand is estimated to be high (see below).

The companies' profitability would be hurt, however, if the higher costs of parts can't be passed through to prices fully.  For example, the company that uses imported parts the least presumably would raise prices the least. This could exert competitive pressure on other companies, dissuading them from passing through the full increase in costs.   Trump's warning to domestic producers not to take advantage of the tariffs to raise prices also could weigh on pricing decisions.  In contrast, auto companies might be able to cut other costs of production that offsets the effect of the tariffs at least in part. 

There may be some unintended consequences, as well.  /1/ From a macro perspective, an increase in demand for labor could boost wages and thus price inflation beyond the initial impact from the tariff.  This result could necessitate tighter monetary policy.  /2/ The tariffs could shift resources into "old" industries, hurting the ability of "new" industries, such as robotics, to expand profitably.  /3/ The tariffs could help the environment by reducing demand for motor vehicles.  However, an increased use of older, less efficient vehicles could worsen it.

Here is some background information regarding how tariffs may impact demand for motor vehicles:

Price Elasticity:  This figure shows the percentage change in demand for a one percent change in price.  The smaller the price elasticity of demand for vehicles, the smaller the decline in vehicle demand from a pass-through of the tariffs to prices. An extreme example would be completely inelastic demand.  In this case, there would be no decline in vehicle demand for a full pass-through of the tariff.  

The consensus estimate for the price elasticity of motor vehicles is about -1.0.  This means that a 1 percent increase in price results in a 1 percent decline in demand.  The price elasticity is higher for lower-income than upper-income people.  

The cross elasticity between imports and domestically-produced vehicles could be higher than for the aggregate.  So, the tariff should result in a significant switch in sales to domestically-produced vehicles from imported ones.   

Tariff as a Tax:  A tariff is essentially a "consumption" tax applied to a subset of goods.  It is easy to avoid paying the tax directly -- don't buy an affected good.  It may not be easy to avoid if the "tariffed" good is used in the production of other goods or services and the latter passes through the higher priced inputs.   The tariff reduces the purchasing power of consumers to the extent it is not avoided.  

This week's US economic data are expected to show modest economic growth.  Consensus looks for little change in the Mfg ISM from 50.3.  It also looks for a slowdown in March Nonfarm Payrolls to +128k from +151k in February and an uptick in the Unemployment Rate to 4.2% from 4.1% -- still an historically low level.  A decline in government payrolls is expected to be partly responsible for the soft data.  Near-consensus prints may not calm the markets' fears by much, as the data might be viewed as being too soon to see the recessionary effects of the tariffs.  Furthermore, the risk of recession is higher when the economy's pace already is slow.

 

 

 

The Fed's Perspective On The Economy and Tariffs

The stock market may stay in a range amidst uncertainty regarding the April 2 announcement of Trump's reciprocal tariffs.  Fears that the tariffs will damage an already slowing economy as well as boost inflation may dominate any news to the contrary at this point.  However, Trump's past actions and recent words suggest there could be less than meets the eye in his threat of reciprocal tariffs, which could limit any stock market pullback ahead of the announcement.

The revised Fed's Central Tendency Forecasts reflect the market's fears, as this year's Real GDP Growth was lowered and inflation raised a bit.  These slight shifts were more an acknowledgement of the expected directions of the tariffs' impacts rather than precise estimates, according to Fed Chair Powell at his post-FOMC news conference.

The Fed is keeping an open mind about how the tariff situation develops.  Powell suggested the Fed would be able to see whether the recent uptick in goods prices reflects tariffs, presumably by seeing whether they are sustained or reversed in coming months.  Importantly, he said that the Fed expects the boost in prices from tariffs will be short-lived.  This suggests the Fed will be slow to react to high CPI/PCE Deflator prints.  It will take several months to see whether the tariffs have a persistent effect on prices. 

Perhaps the most important point made by Powell is that the Fed is focused on economic data, not sentiment surveys, in evaluating the appropriate monetary policy stance.  And, so far, the Fed does not see any impact of weak sentiments on the overall economy.  Indeed, the FOMC Statement said, "Recent indicators suggest that economic activity has continued to expand at a solid pace."  As a result of the Fed's perspective, weak sentiment surveys could become less important for the markets as long as the economic data remain robust.

Last week's US economic data were mixed with regard to the Fed's assessment of the economy.  Consumption looks soft in Q125, but possibly set up to do better in Q225.  Manufacturing Output is back on an uptrend.  The Unemployment Claims data show layoffs remain low but suggest companies remain cautious in hiring.

Consumption still looks to have slowed in Q125 despite the modest rebound in February Retail Sales.  Retail Sales Excluding Motor Vehicles and Gasoline in February were  0.3% (annualized) below the Q424 average.  However, the weakness in the first two months of the year could be just the typical pause after a strong month (December).  Also, bad weather may have played a role, in which case a bounce-back in Q225 is possible.  Supporting this possibility, the February level of Sales is 0.9% (annualized) above the January-February average.  (Retail Sales is just a part of Consumer Spending, but their weakness in January-February fits with large retailers' complaints.)

The 0.9% jump in February Manufacturing Output was led by a rebound in Motor Vehicle Production (to above the Q424 average) and continued strength in High Tech Output (computers, communication equipment and semiconductors).  Away from these two sectors, Manufacturing Output rose moderately for the third month in row -- after falling over most of H224.  This week, consensus estimate of a +0.4% m/m increase in February Durable Goods Orders Ex Transportation supports the view of an uptrend in manufacturing.

The Claims data tell a mixed story.  Initial remained low in the latest week, reaffirming relatively few layoffs are occurring.  However, Continuing rose to the high end of its recent range, suggesting hiring has slowed.  Their bounce could be volatility, though, so it's too soon to draw a firm conclusion about their implications.

The perception of the consumer may improve this week if consensus estimate of +0.6% m/m for February Consumer Spending is right.  Taking account of the consensus estimate of +0.3% m/m for the PCE Deflator (both Total and Core), Real Consumption in February would be 0.8% (annualized) above the Q424 average and 0.4% above the January-February average.  This still shows slower consumer spending than the 2024 pace, but spending remains in an uptrend.  And, the risk is for a lower-than-consensus print for the PCE Deflator, given that the February CPI was 0.2% (both Total and Core).  In this case, Real Consumption would be stronger if the 0.6% increase in Nominal Consumption prints. 

 

 

 

 

 

 

 

Eyes on The Consumer

The stock market could get some relief from February Retail Sales if consensus estimates are right.   Despite recent negative comments from retailers, consensus looks for +0.7% m/m Total and +0.5% Ex Auto.  This could be a weather-related rebound after declines in January (Total down 0.9% and Ex Auto down 0.4%).  Whether the health of the consumer is affirmed by this report could depend on how the January-February average stacks up against Q424 or how February's level compares to the January-February average.  The greater the improvement in either, the healthier the consumer.  If the retailers are right and retail sales fall again, the recession risk will get more play and hurt stocks.

Retailers blame fears of inflation and recession for the sudden consumer pullback they see.  These reasons appear to be confirmed by the University of Michigan Consumer Sentiment Survey.  The irony is that the latest data don't support these fears.  The February CPI and PPI showed that inflation remains near trend, if not slowing a bit.  And, Unemployment Claims indicate a still solid labor market.  Both Initial and Continuing Claims in February are within the low ranges seen since September-October. 

This would not be the first time the consumer pulled back sharply on questionable fears.  The consumer "went on strike" in 1980, reacting to misunderstood Credit Controls by the Carter Administration.  Many consumers apparently believed the Controls banned the use of credit cards, and they stopped spending as a  result.  The economy went into a steep dive that lasted two quarters.  Then, an ending of the Controls and lower interest rates led to a sharp rebound in spending and economic activity in the second half of the year.  

To be sure, there is a possibility that a sudden weakening in consumption has resulted from the stoppage of immigration.  Spending may have slowed as did population and employment growth.  This possibility raises the risk that the trends in consumption and the economy have ratcheted down. 

Trump's tariff actions and threats may continue to be a problem for the stock market.  They have been a mixture of temporary "transactional" moves to achieve an unrelated goal and more permanent revenue-producing tariffs.  The markets are never sure in which category a tariff announcement should be viewed, helping to explain the stock market's wild reactions.  The tariff problem should end for the market when the various countries decide to sit down together to settle the situation, just like what happened between the US and China in 2019-20.

There is a simplistic way of looking at tariffs that may shed light on Trump's actions.  Think of the economy as consisting of producers and consumers.  This is simplistic because everyone is a consumer.  Trump is aiming to help producers by protecting them from foreign competition.  But, he is downgrading consumers.  This split was articulated by Treasury Secretary Bessent, who said "access to cheap goods is not the essence of the American Dream."  Instead, he said "the American Dream is rooted in the concept that any citizen can achieve prosperity, upward mobility, and economic security."

With all this going on, it should not be surprising if this week's FOMC Meeting is a non-event, ratifying Fed Chair Powell's recent comments that monetary policy is on hold.  He will likely restate the policy restraint necessitated by the uncertainty surrounding Trump's policies.  The Central Tendency Forecasts will not likely change much from December, including the possibility of 1-2 rate cuts this year.

 

 

 

Focus On The Economy

The stock market may continue to be weighed down by uncertainty over Trump's tariff policies and their implications for growth and inflation.  Evidence so far points to slow economic growth in Q125  and a continuing downtrend in inflation -- not as bad as feared.  This week's releases of the February PPI and CPI could confirm the downtrend in inflation.

Consensus looks for +0.3% m/m  for both the February Total and Core CPI.  This would be down from 0.4% Total and 0.5% Core in January (start-of-year price hikes).  A 0.2% print for both cannot  be ruled out, even though last year February Core repeated January's high 0.4% print.  Airfares will not likely jump as they did in February 2024.  

Consensus also looks for 0.3% m/m for both February Total and Core PPI.  The Total would be down slightly from 0.4% in January.  Core would match its pace in January's as well as in February 2024, so the y/y should be steady at 2.2%.

The February Employment Report pointed to slow economic growth and low wage inflation.  While it did not completely shut the door on recession, it did not confirm one either.  There were signs of cautious behavior by companies rather than their "throwing in the towel" to brace for recession.

Some of February's +151k m/m Payroll gain was likely a weather-related rebound from January.  The 2-month average, which eliminates the weather effects, is +138k, consistent with a steady Unemployment Rate.  Indeed, the rebound in the Unemployment Rate to 4.1% from 4.0% in January puts it back to the Q424 average.  Although both Civilian Employment and Labor Force fell, the declines could be due to the small sample bias of the Household Survey. This bias is canceled out in the calculation of the Unemployment Rate, making the latter more significant than its components.  A steady q/q Unemployment Rate is not indicative of recession.

The one part of the Report that keeps the "recession" door open is the soft Total Hours Worked (THW).   Although they edged up m/m, they remained below the Q424 average.  The January-February average is 0.5% (annualized) below the Q424 average.  However, Q125 Real GDP Growth still could be positive once productivity is taken into account.  A low Nonfarm Workweek is responsible for the q/q decline in THW.  It suggests companies are responding cautiously to tariff uncertainty by working fewer hours rather than taking the more drastic action of cutting headcount.

There are signs in the Report that DOGE is reducing headcount in the Federal Government.  Jobs there fell 10k m/m (7k in Postal, 3k elsewhere).  The typical m/m change is +3k.

Some of the January-February Payroll slowdown could have resulted from labor shortages stemming from the drop in immigration.  If so, an increase in Job Openings is conceivable.  This week's release of JOLTS data will show Job Openings data for January.  However, it may be depressed by the bad weather and could be too early to see an impact from the drop in immigration.  

Perhaps reflecting a slower economy, wage inflation is back to looking tame.  The 0.3% m/m increase in Average Hourly Earnings in February, after a downward-revised 0.4% in January (was 0.5%), is below the recent 0.4% trend.  The February slowdown was widespread across sectors.

Besides the February Employment Report, there were other important data released last week:

1.  The decline in Initial Claims back to their recent low trend suggests the prior week's jump was related to faulty seasonal adjustment for the holiday.  A drop in Continuing Claims in next week's report would help to confirm this reason.  At this point, the labor market still looks solid.

 2.  Labor Compensation -- the broadest measure of labor costs -- were revised down sharply in both Q424 and Q324.  It now shows that Compensation/Hour rose only 3.8% q/q saar (was 4.2%) in Q424 and 1.3% (was 2.9%) in Q324.  The y/y is now reported as 4.0% in Q424 (same as the y/y for AHE in February) and 2.0% for Unit Labor Costs (which takes account of productivity growth).  The latter is in line with the Fed's 2% inflation target. 

A Positive Development Re Tariffs?

The stock market could be helped by tariff developments this week.  The latest news stories suggest Trump's threat of tariffs on Canada and Mexico is meant to persuade them to impose tariffs on China.  Mexico is said to have agreed to do so and could announce it on Tuesday.  It remains to be seen whether Canada will do so, as well.  Presumably, the US will not impose tariffs on them if they, in fact, follow through.  This would be a positive for stocks and fit with the historical tendency for them to move up in March, more so in April.

At the same time, the markets should continue to be concerned that the tariffs will lead to slower economic growth, if not recession, and higher inflation.  These effects may not happen immediately.  As a result, evidence to the contrary could be dismissed for being too soon to show the effects.  And, evidence that seems to support these concerns could spark a sell-off. 

From this perspective, this week's key US economic data should have little impact on the stock market if consensus estimates print.  The February Employment Report and Mfg ISM are not expected to validate the market's  fears, and thus may be discounted.  

Consensus sees a modest +133k m/m increase in Nonfarm Payrolls, not much different from the +143k in January, a  steady 4.0% Unemployment Rate, and an uptick in the Nonfarm Workweek (weather-related rebound).  Such prints would not indicate recession.  The market may focus on whether DOGE has in fact reduced Federal government jobs.  The jump in Initial Claims to an above-trend level in the latest week may have reflected these layoffs.  However, the Claims data were for a week after the Payroll survey week. Also, the week contained a holiday, which raises the possibility that seasonal adjustment may have exaggerated the increase.  The higher level of Claims needs to be confirmed in this week's release to be meaningful.

Consensus also expects a slowdown in Average Hourly Earnings (AHE) to 0.3% from 0.5% in January.  This would be good news for the inflation outlook as it would be below the prior 0.4% trend.  The market may discount a low print as not yet reflecting attempts by labor to counter the inflationary effects of the tariffs.

Consensus also looks for the February Mfg ISM to stay high, edging down to 50.8 from 50.9 in January.  The Non-Mfg ISM is expected to rise to 53.0 from 52.8.  Although still relatively low, an uptick could be important after the Market PMIs for both the US and Europe showed a sharp weakening in Service Sectors in February.  In Q424, the Mfg ISM averaged 48.1 and the Non-Mfg ISM averaged  54.1.

The Atlanta Fed model dropped its latest estimate of Q125 Real GDP to -1.5%, feeding fears of recession.  This is an early forecast based on little data, however.  In particular, the decline resulted from a large decrease in Net Exports due to a jump in imports of industrial supplies.  This jump may have been in anticipation of tariffs.  If so, much of them most likely was held in inventories.  This did not show up in January inventory data, however, but could appear in data for February or March.  There is often a timing difference between the Trade Deficit and Inventory surveys.  So, the Atlanta Fed model's estimate should probably be viewed with caution.