Trading Blows
The spotlight falls squarely on tariffs this week, as trade policy developments have increasingly dominated market narratives over the past month. Initially, the Trump administration had announced that tariffs on imports from Mexico (25%), Canada (10% for energy, 25% for non-energy), and China (10%) would go into effect at the start of February. The duties on Chinese imports went into effect but, after negotiations, the tariffs on the United States’ neighbors were delayed for a month. Last week, President Trump stated that not only will the delayed tariffs on Mexico and Canada kick in on March 4, but that Chinese goods will also be subject to an additional 10% duty. Over 40% of U.S. imports come from those three countries, so a wide range of goods could become more expensive in a jiffy (assuming that implementation of the tariffs isn’t delayed at the eleventh hour).
On top of potentially stoking further inflation, the tariff storyline has put growth fears at the forefront for investors. Of course, international trade is complicated – the U.S. dollar could appreciate, offsetting some of the impact – but, all else equal, the March tariffs could pull GDP growth downward by more than a full percentage point.
That’s all quite abstract. Here’s a plausible scenario for how things could actually play out:
1. Tariffs push prices higher, so consumers and businesses reduce spending;
2. Lower revenue and/or higher costs result in lower profits;
3. Some firms absorb lower profit margins, while others are forced to cut costs (which could lead to layoffs, less investment, etc.);
4. Consumer and business confidence decline;
5. Growth declines further.
Declining growth and negative sentiment can create a negative feedback loop, but that often plays out over quarters, not days or weeks. That makes it hard for investors to fully integrate the impacts of policy decisions – especially when developments occur as fast as they are right now. Markets reacted swiftly to last month’s tariff announcement, but they’ve been less jumpy this time; perhaps investors view the administration as the “boy who cried wolf.” That suggests that this week might be a volatile one if the tariffs actually go into effect. Time will tell. It’s possible that by the time you’re reading this, another delay will have already been announced.Economic and Earnings Calendar
Monday
• January Construction Spending: Construction data is a leading indicator of business activity.
• February ISM Manufacturing PMI: This index from the Institute for Supply Management tracks how purchasing managers across the manufacturing sector feel about the business environment.
• February Wards Total Vehicle Sales: Cars are a big ticket item for consumers, so underlying vehicle sales trends can help shine a light on demand for durable goods.
• Fedspeak: St. Louis Fed President Alberto Musalem will give a keynote speech on the economy and monetary policy.
Tuesday
• Fedspeak: New York Fed President will be interviewed at the Bloomberg Invest Forum. Richmond Fed President Tom Barkin will repeat a speech from last week called Inflation Then and Now.
• Earnings: AutoZone (AZO), Best Buy Co (BBY), CrowdStrike (CRWD), Ross Stores (ROST), Target (TGT)
Wednesday
• February ADP Employment Report: This survey, usually released a day or two before the official government jobs report, offers insight into private sector employment trends.
• February S&P Global US PMIs: These indexes track how purchasing managers across different industries feel about the business environment.
• January Factory and Durable Goods Orders: These metrics give insight into underlying trends for leading cyclical indicators.
• February ISM Services PMI: This index from the Institute for Supply Management tracks how purchasing managers across different services industries feel about the business environment.
• Fed Beige Book: This report is released eight times per year and tracks the state of the economy based on qualitative information.
• Weekly Mortgage Applications: Mortgage activity gives insight on demand conditions in the housing market.
• Earnings: Brown-Forman (BFB), Campbell Soup (CPB)
Thursday
• February Challenger Job Cuts: The firm Challenger, Gray & Christmas tracks the number of layoff announcements each month by sector.
• January Trade Balance: Trade, made up of exports and imports, is an important driver of economic activity.
• 4Q Productivity and Unit Labor Costs: These measures provide a breakdown of how productive workers were per hour of work and at what cost.
• January Wholesale Inventories and Sales: Wholesalers often operate as an intermediary between manufacturers and retailers, serving as a key part of the goods supply chain.
• Weekly Jobless Claims: This high frequency labor market data gives insight into filings for unemployment benefits. Jobless claims have continued to show a labor market that remains strong despite having cooled.
• Fedspeak: Atlanta Fed President Raphael Bostic will discuss the economic outlook with The Birmingham Business Journal.
• Earnings: Broadcom (AVGO), Cooper Companies (COO), Costco (COST), Hewlett Packard Enterprise (HPE), Kroger (KR)
Friday
• February Employment Situation Summary: This monthly blockbuster release from the Labor Department gives a comprehensive look at employment, wages, and hours worked in the previous month.
• January Consumer Credit: Borrowing activity gives insight into broader economic activity.
• Fedspeak: New York Fed President John Williams will participate in a University of Chicago discussion titled Monetary Policy Transmission Post-Covid.
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