DIGEST – Surprise additional US tariffs on China saw risk sentiment pressured once more yesterday, despite solid enough US data. Today, the latest PCE inflation figures highlight the calendar.
WHERE WE STAND – It was almost a ‘Turnaround Thursday’, yesterday, until President Trump took to social media to confirm that tariffs on Mexico and Canada will indeed be going into place on 4th March.
Furthermore, Trump slapped an additional 10% levy on China, on top of the 10% that was announced earlier in the year, amounting to a total 20% tariff on imports from the world’s second largest economy.
It had looked as if a degree of ‘tariff fatigue’ had set in, though clearly participants aren’t prepared to ignore this apparent escalation in Trump’s protectionist stance, with stocks violently and rapidly selling-off as the headlines crossed. It must be said, though, that this could yet again be a case of Trump ‘crying wolf’, were some kind of concessions to be extracted from Canada or Mexico before next Tuesday.
In any case, for a brief moment yesterday, it did look as if the US data slate may have allayed some concern over a potential ‘growth scare’, with GDP unrevised at 2.3% annl. QoQ in the final three months of last year, and durable goods orders having risen by an above-consensus 3.1% last month. Though initial claims were soft, at 242k, this likely owes to severe weather in New England, and was hence largely shrugged off by market participants.
Taking a step back, I still see the ‘path of least resistance’ leading to the upside for equities over the medium-term, the short-term picture is considerably cloudier. It would make sense for participants to seek to lighten up on positioning into the weekend, particularly ahead of the chunky slate of event risk next week, including – the aforementioned tariff deadline; ISM manufacturing & services PMI prints; as well as the February US labour market report. Those three latter figures are going to hold the key as to whether growth concerns worsen, or if the narrative may begin to turn.
Elsewhere, Treasuries were a touch softer across the curve, albeit with there being little by way of fresh fundamental catalysts, in a move that smacked of participants taking profit coming into the end of the month. Such profit taking isn’t particularly surprising, considering that the benchmark 10-year yield has fallen 20bp in the last week, and with tariff chatter seeing upside inflation risk linger. The risk/reward, though, still favours longs across the Treasury curve, especially at the front-end.
The FX market, meanwhile, might be starting to wake from its recent slumber, though recent ranges continue to be respected on the whole.
Those tariff headlines saw the buck gain ground across the board, with the DXY clearing the 107 handle for the first time in a week, while the CAD was the big underperformer, with USD/CAD trading north of the 1.44 figure.
I still like the dollar higher, here, with recent growth jitters likely overblown, primarily being a result of elevated uncertainty skewing sentiment surveys sharply to the downside, with said figures likely over-stating the impact said uncertainty will have on ‘hard’ data. Lingering tariff risk, which appears to be ramping up, should also provide a further helping hand.
LOOK AHEAD – A quiet docket awaits as the second month of the year draws to an end.
Of today’s releases, this afternoon’s US PCE figures are probably of most interest, with the core PCE deflator – the preferred inflation gauge of FOMC policymakers – seen having risen 2.6% YoY in January, a print that would be the slowest annual pace since last June, though wouldn’t materially move the needle in terms of the policy outlook.
Elsewhere, German inflation data is due ahead of the eurozone-wide CPI data on Monday, while other releases include Q4 Canadian GDP, as well as February’s MNI Chicago PMI report.
