Month-In-Review: March 2018
Escalating tensions between the U.S. and China left investors fearful of an outright trade war with one of the country’s leading trading partners. Businesses and industry insiders were quick to speak out against further restrictions to trade while the equity market whipsawed throughout the month, negatively impacted with each compounding retaliatory move from either side. Meanwhile, the Fed continued to “gradually” remove accommodation with another 25bps increase in rates, the sixth since liftoff in 2015. Furthermore, the Committee continued to reiterate an expectation of additional hikes throughout 2018 amid an improved outlook for growth and inflation despite a seemingly slow start to the year.
Market Activity and Commodities
· Equities – Equities were volatile throughout March, ending the month in the red. Beginning at 2,713.83, the S&P 500 ended down 2.7% in March at 2,640.87. The Dow slid 3.7%, closing out the month at 24,103.11. On quarterly basis, The S&P 500 fell 1.2%, while the Dow dipped 2.5%, marking the first quarterly loss since 2015. Since the start of 2017, however, U.S. equities are up an average 22%.
· Treasuries – Treasury yields closed the month of March mixed. The 10-yr treasury yield fell 7bps in the third month of the new year, closing at 2.74%. The 2-yr treasury, however, rose 6bps in the final month of Q1, closing at 2.27% after reaching a high of 2.35% on the 20th. Since the start of the year, however, the 10-yr has increased 33bps and the 2-yr rose 38bps.
· Oil
o (Mar 5) – According to the International Energy Agency (IEA), U.S. oil will "rule the world" and potentially put a squeeze on OPEC for years to come. The IEA said more than half of the demand growth will be fed by American domestic production through 2023, leaving the cartel with little wiggle room to control the marketplace and manipulate prices. The IEA also warned that oil supply could become "tight" unless there is a rebound in investment in new production following historic declines more recently. Crude traded down 0.03% at $61.23 a barrel following the report.
o (Mar 9) – Crude prices moved slightly higher after a recent stretch of weakness broadly blamed on rising fears of a trade war. Crude traded up 0.72% at $60.55 a barrel.
National Growth and Outlook
· NFIB Small Business Optimism (Mar 13) – The NFIB Small Business Optimism Index rose from 106.9 to 107.6 in February, the highest since July 1983.
· Leading Index (Mar 22) – The Leading Index rose 0.6% in February, one-tenth of a percentage point more than expected, according to Bloomberg, and following a 0.8% rise the month prior.
· Chicago Fed National Activity Index (Mar 26) – The Chicago Fed National Activity Index rose from 0.02 to 0.88 in February, a four-month high, and significantly more than the rise to 0.15 expected, according to Bloomberg. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In February, 63 of the 85 monthly individual indicators made positive contributions, while 22 made negative contributions.
· GDP (Mar 28) – Q4 GDP was revised up from 2.5% to 2.9% in the final Q4 reading, more than the 2.7% rise expected, according to Bloomberg, but still a three-quarter low. Year over-year, growth rose 2.6%, the fastest pace in two-and-a-half years. In the details, personal consumption was revised up from 3.8% to 4.0% in the third-round Q4 GDP report, the highest since Q4 2014. Goods consumption was also revised higher from 7.5% to 7.8%, thanks to an upward revision in nondurable goods from 4.3% to 4.8%. Durable goods, on the other hand, were revised down slightly from 13.8% to 13.7% in the final Q4 GDP report. Service consumption was revised up from 2.1% to 2.3% in the third-round Q4 report, a two-quarter high. Gross private investment was revised up from 3.5% to 4.7% in the third-round Q4 GDP report, reflecting a stronger inventory build in the fourth-quarter. Inventories were revised up from $8.0 billion to $15.6 billion in the final Q4 report, following a $38.5 billion increase in Q3. Fixed investment was revised up one-tenth of a percentage point to 8.2% in the fourth-quarter, a thirteen-quarter high. Nonresidential investment, including office buildings and factories, was revised higher from 6.6% to 6.8%, a three-quarter high, thanks to an upward revision to structures investment from 2.5% to 6.3% in the third-round Q4 report. Equipment investment, however, was revised lower from 11.8% to 11.6%, and intellectual property investment was revised down from 2.4% to 0.8% in the final Q4 GDP report, a four-quarter low. On the trade side, exports were revised down from 7.1% to 7.0%, while imports were revised higher from 14.0% to 14.1% in the third-round Q4 report. Finally, government consumption was revised higher from 2.9% to 3.0% in the final Q4 report. Federal spending was unrevised at 3.2%, while state and local spending was revised up from 2.7% to 2.9% in Q4, following a minimal 0.2% rise the quarter prior.
Employment
· Jobless Claims
o (Mar 1) – Initial jobless claims fell 10k from 220k to 210k in the week ending February 24. The four-week average declined from 226k to 221k.
o (Mar 8) – Initial jobless claims rose 21k from 210k to 231k in the week ending March 3. The four-week average rose from 221k to 223k.
o (Mar 15) – Initial jobless claims fell 4k from 230k to 226k in the week ending March 10. The four-week average, however, remained at 222k for the second consecutive week.
o (Mar 22) – Initial jobless rose 3k from 226k to 229k in the week ending March 17. The four-week average increased from 222k to 225k.
o (Mar 29) – Initial jobless fell 12k from 227k to 215k in the week ending March 24. The four-week average, however, was unchanged at 225k.
· Nonfarm Payrolls (Mar 9) – Nonfarm payrolls unexpectedly surged in February, rising 313k, the strongest monthly increase and the first reading above 300k since July 2016. According to Bloomberg, economists had anticipated a more muted gain of 205k. January payrolls were, furthermore, revised higher from 200k to 239k and December employment was revised up from 160k to 175k. Thus, the overall change in nonfarm payrolls (February data + net revisions) was 367k. The outsized increase in the second month of the year pushed the three-month average up from 210k to 242k, although the six-month average was less affected, up 205k from a previous pace of 189k. In the details, private payrolls increased 287k in February, a twenty-month high. Goods-producing payrolls gained 100k in February, thanks to a 61k increase in construction payrolls and a pickup of 31k manufacturing payrolls. Service producing payrolls increased by 187k in the second month of the new year, following a rise of 166k in January. Trade and transport payrolls were among the leading categories of growth, posting 72k new payrolls, thanks in part to an impressive rebound in retail; retail payrolls rose 50k, more than the past six months combined. Business services payrolls popped 50k, financial services payrolls increased by 28k, and education and health, and hospitality and leisure posted gains of 23k and 16k, respectively. On the weaker side, information services payrolls dropped 12k, the fourth consecutive month of decline. Government payrolls jumped 26k in February, the most in over a year. The increase was at the state and local level, however, with federal employment declining by 7k in February.
· Participation Rate (Mar 9) – The civilian labor force increased by 806k in February. As a result, the participation rate inched higher to 63.0% from 62.7% at the start of the year.
· Unemployment Rate (Mar 9) – Household employment rose 785k in February on par with the rise in the labor force. Therefore, the unemployment rate was unchanged at 4.1%, a more than seventeen-year low.
· Average Hourly Earnings (Mar 9) – Average hourly earnings rose just 0.1% in February following a larger-than-expected increase of 0.3% in January. As noted in the past, wages have followed a similar pattern in recent years with a strong gain early on that fizzles over the subsequent months. Year-over-year, wages rose 2.6% in February, down from a 2.8% pace reported in January.
· Average Weekly Hours (Mar 9) – The average workweek rose from 34.4 to 34.5 in February, a two-month high.
· JOLTS (Mar 16) – The number of job openings increased 8.6% in January from 5,811k to a record high of 6,312k.
Consumer Activity and Confidence
· Vehicle Sales (Mar 1) – Total vehicle sales fell 0.6% in February from 17.07m to a 16.96m unit pace, a six-month low. Year-over-year, vehicle sales declined 2.1%, the fourth consecutive month of waning annual momentum.
· Consumer Credit (Mar 7) – Consumer credit increased by $13.91 billion in January following a $19.21 billion increase the month prior. Since the start of 2017, monthly gains in consumer credit have averaged $16.14 billion.
· University of Michigan Consumer Sentiment
o (Mar 2) – The University of Michigan Consumer Sentiment Index fell from 99.9 to 99.7 in the final February report, albeit still a four-month high. In the details, consumers’ assessment of current conditions decreased from 115.1 to 114.9 and consumers’ expectations fell from 90.2 to 90.0 in February, still the highest reading since November.
o (Mar 16) – The University of Michigan Consumer Sentiment Index rose from 99.7 to 102.0 in the preliminary March report, the highest since January 2004. In the details, consumers’ assessment of current conditions increased from 114.9 to 122.8, while consumers’ expectations fell from 90.0 to 88.6, still a four-month high.
o (Mar 29) – The University of Michigan Consumer Sentiment Index fell from 102.0 to 101.4 in the final March report. Despite the decline, the index remains at the highest reading since January 2004. In the details, consumers’ assessment of current conditions decreased from 122.8 to 121.2, while consumers’ expectations rose from 88.6 to 88.8 in the final March report.
· Retail Sales (Mar 14) – Retail sales declined 0.1% in February, significantly weaker than the 0.3% rise expected, according to Bloomberg, and following a 0.1% drop the month prior. Year-over-year, retail sales increased 4.0% in February, a two-month high. Car sales fell 0.9% in February, the fourth consecutive month of decline, and gasoline stations sales fell 1.2%, an eight-month low. Excluding autos, retail sales rose 0.2% in February and increased 4.4% over the past 12 months. Excluding autos and gasoline, retail sales increased 0.3% in February and rose 4.0% year-over-year. In the details, building materials sales rose 1.9%, clothing sales increased 0.4% and sporting goods sales improved 2.2% in February, a thirteen-month high. Also, miscellaneous sales rose 0.1% in February following a 3.5% rise the month prior. On the weaker side, furniture sales declined 0.8%, electronics and food and beverage sales both declined 0.1%, and health and personal care sales fell 0.4% in February, a two-month low. Gasoline stations sales declined 1.2% in February following a 1.9% rise the month prior. Finally, general merchandise sales fell 0.4% in February, thanks to a 0.9% decline in department store sales, a two-month low.
· Consumer Confidence (Mar 27) – The Consumer Confidence Index unexpectedly fell from 130.0 to 127.7 in March, a two-month low. According to Bloomberg, economists had forecasted a rise to 131.0. The three-month average, however, rose from 125.8 to 127.3, noticeably above the recent low of 94.8 in June 2016. In the details, expectations declined from 109.2 to 106.2 and present situation fell from 161.2 to 159.9 in March, a two-month low.
Inflation
· CPI (Mar 13) – The CPI rose 0.2% in February, as expected, according to Bloomberg, and following a 0.5% increase the month prior. Year-over-year, headline consumer prices rose 2.2% in February, a three-month high. Energy costs rose 0.1% in February, a two-month low, while food prices were unchanged in February following a 0.2% rise in January. Excluding food and energy, the core CPI rose 0.2% in February and 1.8% over the past 12 months for the third consecutive month. In the details, services costs rose 0.3% in February, matching the rise the month prior. Housing prices also increased 0.3% in February, thanks to a 0.2% rise in the OER. Apparel prices rose 1.5% in February following a 1.7% rise the month prior. Fuels and utilities prices increased 1.0% and other goods and services costs rose 0.2% in February, thanks to a 0.1% rise in tobacco prices. On the weaker side, recreation prices and transportation prices were flat in February, medical care prices declined 0.1% and education and communication costs decreased 0.2%, thanks to a 1.2% drop in personal computer prices. Finally, commodities prices declined 0.1% in the second month of the year, a four-month low.
PPI (Mar 14) – The PPI rose 0.2% in February, as expected, according to Bloomberg, and following a 0.4% rise the month prior. Year-over-year, headline producer prices rose 2.8% in February following a 2.7% rise the month prior. At 2.8%, this is the seventh consecutive reading above 2%. In the details, food prices declined 0.4% following a 0.2% decrease the month prior, and energy prices fell 0.5% in February, a nine-month low. Year-over-year, energy prices rose 9.1%, a four-month low. Excluding food and energy costs, the core PPI also rose 0.2% in February and increased 2.5% over the past 12 months, less than the 2.6% increase expected, according to Bloomberg, but still the highest since February 2012. At 2.5%, this is the seventh consecutive reading above 2%.
Manufacturing and Production Activity
· ISM Manufacturing (Mar 1) – The ISM Manufacturing Index rose from 59.1 to 60.8 in February, a larger than expected increase, according to Bloomberg, and the highest since May 2004. In the details, prices paid rose from 72.7 to 74.2 in February, employment improved from 54.2 to 59.7 and inventories increased from 52.3 to 56.7, the highest reading since March 2010. On the other hand, production declined from 64.5 to 62.0 in the second month of the year and new orders decreased from 65.4 to 64.2, a three-month low.
· Factory Orders (Mar 6) – Factory orders declined 1.4% in January, as expected, according to Bloomberg, and following a 1.8% rise the month prior. Year-over-year, factory orders increased 6.6% in January, a three-month low.
· ISM Non-Manufacturing (Mar 6) – The ISM Non-Manufacturing Index fell from 59.9 to 59.5 in February, a two-month low. In the details, new orders rose from 62.7 to 64.8, backlog of orders increased from 50.5 to 56.0 and export orders rose to 59.5 in February, a four-month high. Supplier deliveries were unchanged at a reading of 55.5 in February for the third consecutive month. On the weaker side, prices paid declined from 61.9 to 61.0, employment fell from 61.6 to 55.0 and imports fell to 50.0 in February, following a reading of 54.0 the month prior, and a nine-month low.
· Empire Manufacturing (Mar 15) – The Empire Manufacturing Index rose from 13.1 to 22.5 in March, more than the expected rise to 15.0, according Bloomberg, and a five-month high. In the details, prices paid rose from 48.6 to 50.3, new orders increased from 13.5 to 16.8 and inventories rose from 4.9 to 5.6 in March, a two-month high. On the other hand, employment fell from 10.9 to 9.4 and the average workweek declined from 20.8 to 14.7 in March, a three-month low.
· Philly Fed Business Outlook Survey (Mar 15) – The Philly Fed Index declined from 25.8 to a reading of 22.3 in March, slightly more than the expected decline to 23.0, according to Bloomberg, and a two-month low. In the details, new orders increased from 24.5 to 35.7, shipments rose from 15.5 to 32.4 and employment improved to 25.6, a five-month high. On the weaker side, prices paid fell from 45.0 to 42.6 in March, a two-month low.
· Industrial Production (Mar 16) – Industrial production rose 1.1% in February, more than the 0.4% rise expected, according to Bloomberg, and a four-month high.
· Capacity Utilization (Mar 16) – Capacity utilization rose from 77.4% to 78.1% in February, the highest since January 2015.
· Kansas City Fed Manufacturing (Mar 22) – The Kansas City Fed Index remained unchanged at a reading of 17 in March for the second consecutive month, the highest reading since October 2017. The index has maintained a positive reading for sixteen consecutive months, matching the streak in 2011-2012.
· Durable Goods (Mar 23) – Durable goods orders rose 3.1% in February, more than the 1.6% rise expected, according to Bloomberg, and following a 3.5% decline the month prior. Year-over-year, headline orders rose 9.1% in February, a two-month high. Transportation orders increased 7.1% in February following a 9.8% decline the month prior, thanks to a 25.5% increase in civilian aircraft orders, a five-month high. Excluding transportation, durable orders rose 1.2% in February and increased 7.9% over the past 12 months. In the details, electrical equipment orders rose 2.6%, primary metals orders gained 2.7% and machinery orders rose 1.6% in February, a four-month high. On the weaker side, computer and electronics orders fell 0.2% in February for the second consecutive month.
· Capital Goods (Mar 23) – Capital goods orders rose 5.8% in February, more than offsetting the 4.7% decrease the month prior. Nondefense capital goods rose 4.5% in February, a five-month high. Capital goods excluding aircraft and defense – a proxy for business investment – increased 1.8% in February, a five-month high and following a 0.4% decline the month prior. Year-over-year, business investment increased 7.7%, a two-month high.
· Dallas Fed Manufacturing (Mar 26) – The Dallas Fed Manufacturing Outlook Index fell from 37.2 to 21.4 in March, a four-month low. According to Bloomberg, the index was expected to decline to a reading of 33.5. Since the start of 2016, the index is up more than 55 points.
· Richmond Fed Manufacturing (Mar 27) – The Richmond Fed Index fell from 28 to a reading of 15 in March, a two-month low.
· Chicago PMI (Mar 29) – The Chicago PMI fell from 61.9 to 57.4 in March, a one-year low, albeit the twenty-fifth consecutive month of expansion (a reading above 50). In the details, four of the five components – prices paid, employment, inventories and supplier deliveries – gained momentum in the third month of the year.
Housing Market Activity
· Construction Spending (Mar 1) – Construction spending was unchanged in January, below the 0.3% rise expected, according to Bloomberg, and following a 0.8% gain the month prior. Construction spending averaged 0.7% over the last six months and rose 3.2% year-over-year.
· NAHB Housing Market Index (Mar 15) – The NAHB Housing Market Index fell from 71 to a reading of 70 in March, a four-month low. According to Bloomberg, the index was expected to rise to a reading of 72.
· Housing Starts (Mar 16) – Housing starts declined 7.0% in February following a 10.1% increase the month prior, pulling the annual pace down from 1,329k to a 1,236k unit pace, a two-month low. According to Bloomberg, starts were expected to fall a more modest 2.7% in February. Single family starts rose 2.9% in the second month of the year, while multi-family starts dropped 26.1%, more than offsetting the 25.6% gain the month prior. Year-over-year, housing starts fell 4.0% in February, led by an 18.7% decline in multi-family starts, a two-month low. Single family starts, meanwhile, rose 2.9% over the past 12 months following a 7.6% annualized rise reported in January. On a regional basis, three out of four regions posted declines in February: starts fell 3.5% in the Northeast, 7.3% in the South and 12.9% in the West. On the other hand, starts rose 7.6% in the Midwest, a five-month high.
· Building Permits (Mar 16) – Building permits fell 5.7% in February from 1,377k to a 1,298k unit pace, a five-month low. Year-over-year, permits rose 6.5% in February following a 5.9% pace the month prior. Multi-family permits fell 14.8% in February and increased 10.7% year-over-year, an eleven-month high. Single family permits, however, declined 0.6% in February but rose 4.6% year-over-year.
· Existing Home Sales (Mar 21) – Existing home sales rose 3.0% from 5.38m to 5.54m in February, a two-month high. The rise in monthly home sales was driven by a 4.2% rise in single family sales. Multi-family sales, on the other hand, fell 6.5% in February following a 1.6% rise the month prior. Year-over-year, single family sales gained 1.8%, while multi-family sales declined 4.9% in the second month of the year. From a price standpoint, the median price of a previously owned home rose 5.9% from a year earlier to $242k in February.
· New Home Sales (Mar 23) – New home sales declined 0.6% in February from 622k to a 618k unit pace, a four-month low. With a decline in the pace of sales, the months’ supply of new homes for sale increased from 5.8 to 5.9 months in February, a six-month high. From a price standpoint, the median cost of a newly constructed home rose 0.6% in February to $327k. Year-over-year, new home prices rose 9.7% in February, the highest since December 2016, and following a 3.1% annual pace reported in January.
· S&P/CS 20 City Index (Mar 27) – The S&P Case-Shiller 20 City Home Price Index rose 0.8% in January and 6.4% year-over-year, a two-month high.
· Pending Home Sales (Mar 28) – Pending home sales rose 3.1% in February, surpassing expectations of a 2.0% rise, according to Bloomberg, and following a 4.7% decline the month prior. Year-over-year, however, pending home sales declined 4.4% in February.
Trade and Currency
· U.S. Dollar
o (Mar 1) – With the market betting on additional Fed action – as many as four rate hikes by the end of the year – the trade-weighted dollar rallied to a six-week high. The dollar traded up 0.23% at $90.82.
o (Mar 21) – Following the latest Fed decision to raise rates 25bps, the dollar fell 0.6% to $89.78.
· Euro
o (Mar 5) – The euro fluctuated after the results of the Italian election were announced as investors tried to determine what the populist surge would mean for the markets and potential policy. The euro traded down 0.12% at $1.23 against the U.S. dollar.
· Trade (Mar 7) – The U.S. trade balance widened from $53.9 billion to $56.6 billion in January, the largest deficit since October 2008, and more than expected. According to Bloomberg, economists had forecasted a rising deficit of $55.0 billion. U.S. trade data has gained particular focus as of late amid the Trump administration's more protectionist stance.
· Import Prices (Mar 15) – Import prices rose 0.4% in the second month of the year and 3.5% over the past 12 months, as expected, according to Bloomberg, and a three-month high. Trade prices increased an average of 0.2% per month throughout 2017.
Monetary Policy, Reports, and Commentary
· Atlanta Fed GDPNow Forecast
o (Mar 15) – Following the disappointing consumer activity report in February, the Atlanta Fed GDPNow forecasted just 1.9% Q1 GDP growth, down from earlier estimates of 2.5%, and above 5% six weeks ago! Had 5% growth been reached, it would have been the best quarter since the Great Recession ended in mid-2009. On the other hand, at 1.9%, Q1 may potentially be the weakest quarter since Q1 2017.
· Fed Speak
o (Mar 6) – Speaking at a Money Marketeers Forum in New York, Federal Reserve Governor Lael Brainard indicated a more accelerated pathway for rates may be appropriate should the U.S. economy continue to gain momentum along with a backup in inflation. A noted dove, Brainard suggested she would support a faster rise in rates should the outlook for the U.S. economy remain "the mirror image" of a couple of years ago, "with headwinds shifting to tailwinds."
o (Mar 6) – Dallas Federal Reserve President Robert Kaplan continued to forecast three rate hikes in 2018. Speaking on CNBC, Kaplan said he expected "approximately three moves" this year.
o (Mar 23) – Speaking in Knoxville, Tennessee, Atlanta Fed President Raphael Bostic reiterated the Fed’s data-dependent stance, suggesting policy officials will continue to raise rates, should the economy warrant additional hikes: “If the economy evolves roughly as I suspect, I will likely support further increases over the course of the year.”
· March 21st FOMC Rate Decision – As expected, the FOMC opted to raise rates 25bps to a range of 1.50% to 1.75%. The first rise for the year, the increase marked the sixth hike since liftoff in 2015. In the statement, the Fed reiterated a more positive assessment of the domestic economy, however, the Committee downgraded their characterization from “solid” to “moderate.” Noting job gains have been “strong” following February’s nonfarm payrolls print of 313k, the Committee also tempered their assessment of other key areas including 1) household spending following three consecutive months of negative activity, and 2) business fixed investment with durables orders disappointing as of late. On the inflation front, the Committee continues to anticipate a near-term rise in prices, reiterating an expectation for inflation to rise “in the coming months.” In the accompanying projection materials, the Committee continues to anticipate three rate hikes (two additional hikes after the March move) in 2018. However, looking out to 2019, the median forecast was increased from two to three rate hikes with the forecast for Fed funds reaching 3.50% by 2020. In terms of growth, the Committee increased their forecast for topline activity in the near and medium-term: in 2018, the Fed anticipates a growth rate of 2.6-3.0%, increased from 2.2% to 2.6% as reported at the end of last year and in 2019 to a range of 2.2% to 2.6%, improved from 1.9% to 2.3%. Longer-term, the Fed’s outlook for GDP was little changed at 1.8%-2.0%. The Fed also improved their outlook for unemployment over the next 24 months with a reduced upper bound of 3.8% in 2018 and 3.6% in 2019, as opposed to a previously reported range of 3.7-4% and 3.6-4%, respectively. The latest decision to raise rates a quarter of a percentage point was unanimous.
Domestic News and Activity
· Politics and the Trump Administration
o (Mar 1) – The Trump administration announced a fresh round of tariffs targeting steel and aluminum imports. The negative reactions, as Bloomberg News put it, "came thick and fast, from home and abroad." According to reports, Canadian officials were outraged, saying the taxes were "unacceptable." European officials, meanwhile, vowed to retaliate against the U.S., while the Chinese simply labeled the move "stupid." Back at home, business groups and companies including CSX, Toyota, MillerCoors and Hershey expressed their frustration and concerns of declining product affordability. Defending the move, President Trump tweeted that "trade wars are good, and easy to win."
o (Mar 5) – Despite angry reactions and threats of retaliation, according to the White House, there would be no exclusions for U.S. allies when it came to the steel and aluminum tariffs of 25% and 10%, respectively. Furthermore, President Trump lashed out that European carmakers will "pay the price" if the EU hits back.
o (Mar 6) – According to U.S. Trade Representative Robert Lighthizer, to complete NAFTA 2.0, we will need agreement on roughly 30 chapters. With the clock ticking, some analysts suggested that the president may be using the latest round of tariffs as additional pressure to get a NAFTA deal done. In essence, the most recent tariff proposal may be ultimately used as a bargaining chip to ensure demands on new international trading deals are met.
o (Mar 7) – White House economic advisor, Gary Cohn, decided to leave his post as a result of the tariff proposal, allegedly resigning after a "confrontation" in the Oval Office during which he refused to back the policy publicly. Previously planned meetings between the president and companies that rely on aluminum and steel were cancelled following Cohn’s resignation.
o (Mar 8) – More than 100 House Republicans signed a letter opposing U.S. tariffs on imported aluminum and steel. Furthermore, following mounting opposition from abroad, White House officials announced that there may be "potential carve-outs" for Mexico, Canada and others based on "national security." According to National Trade Council Director Peter Navarro, Canada and Mexico would initially be excluded as long as an updated NAFTA deal is reached.
o (Mar 8) – The president formalized the new round of tariffs: 25% on steel and 10% on aluminum. The proclamation, however, was more flexible than originally suggested, offering immediate carve-outs for Mexico and Canada. The president, furthermore, told reporters, that the policy toward longtime trade partners, like Australia, would be "flexible." Despite opportunities to avoid the tariff, many market participants, as well as foreign and domestic leaders, remain opposed to the nature of the tariff altogether.
o (Mar 13) – According to the House Intelligence Committee, Trump's campaign did not collude with Russia before the election. Despite fierce objection from Democrats, Republican leaders ended their investigation having found "no evidence of collusion."
o (Mar 14) – Secretary of State Rex Tillerson was excused from his position at the White House due to “a different mind-set, a different thinking” between him and the president, according to the White House.
o (Mar 14) – Democrat Conor Lamb won the House seat in Pennsylvania's 18th Congressional District against Republican Rick Saccone. According to the results, Lamb won by 755 votes out of about 227,000. During the 2016 presidential election, President Trump won this region by 20 percentage points and the seat had been Republican for 15 years.
o (Mar 15) – Larry Kudlow agreed to take on the role as the top economic advisor to President Trump, replacing Gary Cohn. "We don't agree on everything, but in this case I think that's good," Trump said. "I want to have different opinions. We agree on most. He now has come around to believing in tariffs as a negotiating point." In his earlier years, Kudlow was an advisor to President Ronald Reagan and more recently known for his role as a senior contributor on CNBC.
o (Mar 15) – Congress took a step towards easing regulation. In a 67 to 31 vote, the U.S. Senate voted to ease bank rules and reform Dodd-Frank. According to reports, the bill increases the asset level at which a bank becomes "systemically important" from $50 billion to $250 billion and exempts banks with less than $10 billion in assets from rules banning proprietary trading. Since the financial crisis, leaders in Washington struggled with enacting protections to avoid another Great Recession without punishing or impeding the financial sector from functioning and growing.
o (Mar 16) – According to Chamber of Commerce President Thomas Donohue, "Tariffs could lead to a destructive trade war with serious consequences for U.S. economic growth and job creation.” Donohue warned that rising costs could offset the savings American families are expecting from the doubling of the standard deduction in tax reform.
o (Mar 19) – According to the U.S. Treasury, the national debt exceeded $21T for the first time, just over six months after it reached $20T on September 8. The massive increase came after Congress and President Trump passed a debt limit suspension in February, allowing unlimited borrowing until March 1, 2019. Federal borrowing nearly doubled during the Obama administration, and it has continued to rise under President Trump.
o (Mar 20) – According to reports, G-20 finance chiefs were “unusually blunt” in warning Steve Mnuchin about the risks of the "America First" agenda. Finance ministers met in Buenos Aires to discuss the global economic agenda. According to the Treasury Secretary, the focus for the U.S. is to level the [global] playing field for U.S. companies and workers.
o (Mar 23) – President Trump named John Bolton as his new national security advisor. Bolton succeeds Lt. Gen. H.R. McMaster who vacated the position on March 22. The change-up in the president’s inner circle follows the departure of Gary Cohn as economic advisor, a position later filled by Larry Kudlow.
o (Mar 23) – A third-round government shutdown for the year was averted after President Trump signed a $1.3 trillion spending bill. Prior to the bill reaching the president’s desk, the Senate voted 65-32 in favor of the bill and several hours earlier, the House approved the measure 256-167. While hardly a long-term solution, the latest proposal will keep government agencies funded until Sept. 30. The measure includes funds for border fencing and money to fight opioid addiction. It also includes new gun control regulations.
o (Mar 23) – The U.S. granted the EU a temporary exemption from the aluminum and steel tariffs while the two sides negotiate. Exemptions were previously granted to Mexico and Canada when the tariffs were signed into law earlier this month; Argentina, Australia, Brazil and South Korea are also reportedly “off the hook.”
o (Mar 26) – According to the WSJ, San Francisco Federal Reserve President John Williams is the top candidate to replace William Dudley as head of the New York Fed. A key role, the position both oversees Wall Street and has a permanent vote on the FOMC (other district presidents vote on a rotating annual basis). Williams, a known dove, has indicated support for the consensus forecast of three rate hikes this year – based on an improved inflation outlook. His nomination, however, may face opposition, as outside groups such as the Center for Popular Democracy among others in Congress have voiced the need for a female candidate.
o (Mar 26) – Chinese Vice Premier Liu He and U.S. Treasury Secretary Steve Mnuchin began “quiet talks” to improve U.S. access to markets. According to those familiar with the situation, the Trump administration sent a letter to Liu outlining specific requests to help reduce China's trade surplus with the U.S. including a tariff cut on U.S. automobiles, more Chinese purchases of U.S. semiconductors and greater access to China's financial sector by American companies.
o (Mar 26) – The U.S. exempted South Korea from President Trump's latest round of metal tariffs after revising its six-year-old bilateral trade deal with the U.S. According to reports, Seoul will double its import quota for American-made cars and reduce the amount of steel it sends into the United States. South Korea will also allow the U.S. to keep its 25% tariff on pickup trucks in place for 20 more years.
o (Mar 27) – The Office of Government Ethics is looking into Jared Kushner's family real estate company for “ethics or criminal law violations.” In the capacity as a senior White House aide, Kushner met with firms who later gave loans to the Kushner Company. The loans include $184 million from Apollo Global and $325 million from Citigroup.
o (Mar 28) – The U.S. Treasury sold nearly $294B of debt, the highest weekly figure since the record set during the 2008 financial crisis. The growing issuance came amid rising concerns over declining federal revenue due to the president’s recent tax reform plan and increased spending in Washington.
International News and Activity
· European Union
o (Mar 5) – Italian voters let their disappointment in the establishment after years of economic weakness be known. The euroskeptic Five Star Movement was the big winner in the latest election with 32.5%, becoming Italy's largest single party.
o (Mar 5) – The Eurozone composite PMI fell from 58.8 to 57.1 in February. While still above a reading of 50, the slower pace of expansion suggested the Eurozone economy may have hit a slight "speed bump" at the start of the year.
o (Mar 8) – The ECB opted to leave rates unchanged in its latest policy announcement. While market participants widely expected policymakers to leave the lending rate unchanged at 0.25%, partially unexpected, the central bank dropped its pledge to accelerate bond purchases should the Eurozone economy lose momentum. Many expected the ECB to reiterate its commitment of additional support amid the recent volatility in global equity markets, rising concerns over deteriorating trade relations with the U.S. and an unexpected populist surge in Italy. A sign purchases could end this year, the change in language suggested increased confidence in the health of the Eurozone economy. At present, the ECB will continue to purchase €30bn in assets per month, a program expected to run at least through September.
o (Mar 14) – ECB president Mario Draghi reaffirmed a patient but optimistic stance regarding monetary policy over the near to medium-term. Speaking at the ECB and Its Watchers conference in Frankfurt, Germany, Draghi said, "We currently see inflation converging toward our aim over the medium term, and we are more confident than in the past this convergence will come to pass...But we still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent."
o (Mar 22) – The Eurozone IHS market index dropped from 57.1 to 55.3 in February. While still signaling expansion (a reading above 50), this marked the weakest pace of activity in more than a year. Analysts cited trade concerns undermining business and consumer confidence as the catalyst for the recent decline.
· The U.K.
o (Mar 22) – The Bank of England kept its main interest rate unchanged in its latest policy announcement. Officials voted 7-2 in favor of no change and offered no specific commitment on the timing of the next move. The central bank’s latest decision followed an updated forecast from U.K. Treasury Chief Philip Hammond showing U.K. economic growth should be modestly higher in 2018.
· China
o (Mar 5) – China's 2018 growth target is about 6.5%, relative to last year's target of "around 6.5% or higher if possible." In the details, monetary policy is expected to be neutral, while the budget deficit goal was cut to 2.6% of GDP. With a modest fiscal drag, a potentially slower growth rate for the world’s second-largest economy could translate into a reduction of demand for raw materials and commodities in general, which in turn may help depress global price levels as developed countries import deflationary pressures from abroad.
o (Mar 6) – China relaxed liquidity requirements, lowering the amount of capital lenders must set aside to cover bad loans. According to reports, regulators reduced the bad-loan coverage ratio from 150% to 120%.
o (Mar 9) – Chinese consumer prices increased 2.9% in February, nearly double the 1.5% rise reported in January. The jump in the CPI was the strongest since 2013.
o (Mar 12) – China's parliament passed a series of constitutional amendments, including one that removes presidential term limits. Such a change allows current President Xi to remain in office indefinitely.
o (Mar 14) – Chinese industrial output grew 7.2% in January-February following a 6.6% rise at the end of 2017. Additionally, retail sales rose a solid 9.7% in January-February, albeit a one-year low. Despite the positive economic news, many remained concerned over impending U.S. tariffs and deteriorating trade relations between the two nations.
· Japan
o (Mar 2) – According to Governor Haruhiko Kuroda, the Bank of Japan will start thinking about how to exit its massive monetary stimulus beginning around April 2019. While still a ways off, this was the most calendar-specific and clearest guidance the central bank Governor has given.
o (Mar 6) – Later, BOJ Governor Haruhiko Kuroda clarified earlier comments which were apparently misinterpreted by the market. Speaking to lawmakers at a second confirmation hearing in Japan’s parliament, Kuroda clarified his remarks: "I didn't say that we would make a change in FY2019, what I said was that the chance of inflation reading 2% in FY2019 was high. I never said we would be exiting immediately."
o (Mar 9) – The Bank of Japan voted to keep the benchmark rate unchanged at -0.1% and the yield on 10-year government bonds near 0%. During the press conference following the rate announcement, Governor Haruhiko Kuroda noted that now was not the time to discuss details of an exit strategy. After all, Japanese inflation remains still-well below the central bank’s target, up 1.4% in the latest January reading. Although, the Governor remained optimistic, suggesting there was a good chance inflation will reach the 2% objective by 2019.
· South Korea
o (Mar 6) – According to South Korean officials, North Korean President Kim Jong Un is open to denuclearization if the "safety of his regime is guaranteed." A meeting between the two leaders was scheduled for the end of April at which point North Korea is reportedly ready for "candid talks" with the U.S. President Trump, however, reportedly remained skeptical of such an improvement in relations, tweeting, "We will see what happens."
· Canada
o (Mar 15) – Canadian Prime Minister Justin Trudeau was willing to accelerate NAFTA negotiations in light of the upcoming elections in both the U.S. and Mexico. Speaking to Bloomberg Television, Trudeau said he was "very optimistic we're going to be able to get to a win-win-win" deal, downplaying the impact on business investment. According to the White House, Trudeau "has been on the phone with the president," making concessions "hand over fist."
· Russia
o (Mar 19) – Vladimir Putin won Russia's presidential election by a landslide, extending the leader’s 18-year rule. With 77% voter support, Putin is the country’s longest-serving leader since Stalin. His reign continues amid escalating confrontation which, according to the WSJ, plays well with an “electorate nostalgic for Russia's superpower status.”
-Lindsey Piegza, Ph.D., Chief Economist