1. Tariff talk or just that?
Warning, what you are about to read is not a political opinion; these are biases interpreted from price action. First, President Trump has "proposed" tariffs, not "imposed". Second, one of the Presidents greatest strengths is bringing different sides to the negotiating table. While the media has been a platform for many to criticize the White House’s latest move, the question we want to answer is whether or not last week’s weakness was justified and to what extent. Since the election, the market has been in a "prove me wrong" rally. This allowed complacency and bred strategies that sold reduced volatility because, simply, it was easy. February’s vicious correction was the byproduct of such. The market is now in a "sell first, ask questions later" environment and this exacerbated Thursday’s selloff. Yes, we believe if investors were not so jittery due to February’s correction, the market would only have lost a small portion of what it did Thursday. It might be hard to admit, but outside of the erratic tweets and erroneous comments, President Trump has been much more calculated than many give him credit for, i.e. the campaign and victory. Some could say the tariff talk was to avert coverage of the Kushner news.
However, another thought is that the tariffs were announced during a week of dollar strength. Remember, the White House does not want to see a stronger dollar and has found itself in hot water due to dollar related comments. Fed Chair Jerome Powell had potentially sparked a short-covering rally in what was an oversold bounce in the Dollar. Powell’s assertive tone has paved the way for a new Fed regime, one that will speak more openly than the political, yet very successful style, of his predecessor Yellen. The Fed’s favorite phrase has been “gradual” and gradual has come to mean anything but four hikes in one year.
Lost in much of the noise Thursday and Friday were comments from voting NY Fed President Dudley who said, “four hikes this year would be gradual”. We believe this got the selling underway Thursday morning while the tariff news brought the hammer in a ‘sell fist, ask questions later’ environment. Digesting all of this, we believe that the White House is taking a calculated action with these tariffs. Furthermore, exemptions or reductions on tariffs for major players or NAFTA affiliations are likely to be seen which reduces the impact of such news. Considering Friday’s late recovery in equities and a near 2% gain by the domestically focused Russell, this news just isn’t as bad as the media has made it out to be. Lastly, the real headwind is wages with Nonfarm Payroll this week; a strong increase in wages will bring further traction to Dudley’s comments.
2. Nonfarm Payroll
February’s Nonfarm Payroll Report is due this Friday and its going to be a big one. In recent months, the focus has shifted from headline job creation to wage growth. Lagging inflation has been the key component keeping the Fed from hiking at a faster pace. The inflation argument gets coupled with wage growth as it has also been disappointing. While inflation has recently stabilized and up-ticked, so has wage growth. Last month’s read showed an increase in average hourly earnings of 0.3%; this reflected an annualized growth of 2.9%, the highest since 2009. This week’s report expects another increase of 0.3% to accompany job growth at 200k. As we discussed above, the equity market is now in a ‘sell first, ask questions later’ environment. A strong read in wage growth, one in-line with these expectations or higher will further NY Fed President Dudley’s argument that four hikes this year is gradual. ISM Non-Manufacturing is due on Monday and this another key data point. If we see strong data through the week capped off with a strong Nonfarm Payroll, we are likely to see the 10-year Treasury yield make another run at 3%. This concoction of events will not be good for equities; good news is bad news.
3. Bank of Japan
The BoJ meets Thursday evening U.S. time and the yen is primed to break out. The central bank is not expected to change policy this week, but Governor Kuroda just committed to a new five-year term and commented last week that they are likely to begin an exit from ultra-loose monetary stimulus in April 2019. The BoJ already surprised markets in January by reducing its longer-dated bond purchases; tapering. The Yen has risen 6% since the announcement and is currently trading against a rare major four-star resistance level at .9480-.9491. In Thursday’s FX Rundown we discussed how our Bias is outright bullish the yen and a close above here on a technical basis could spark a move to 1.00 this year. According to the CME CoT, Leveraged Speculators are net-short the Yen 3:2; this signals there is tremendous room for a short covering rally. The week ahead is a gauntlet of data, Fed speakers and news on tariff talk which is a recipe for Yen volatility, however, a hawkish BoJ would spark the next leg higher.
4. China CPI
Chinese inflation data is due out Thursday evening and analysts are expecting the MoM read to come in at 0.8%. This would be the hottest read in more than a year. Inflation has not been a bright spot in the Chinese economy, trending lower since peaking a year ago. As the U.S. dollar strengthened over the last week and a half, the metals camp has taken a bit of a bath. This will be an interesting number to keep an eye on as it could reinvigorate a rally in gold, silver, copper, platinum and palladium. Of course, a main factor in these metals will continue to be the U.S. dollar which should also be monitored in making trading decisions.