Much of last week has been spent reacting to and wondering about the potential tariff announcement expected tomorrow or Friday. The market reaction is vastly out of proportion to the actual effect of the expected tariffs on steel and aluminum. In actuality, steel and aluminum imports make up less than 2% of our GDP. The major volatility is caused by the uncertain “after effects”. Will there be any exemptions? (Today’s indications of exemptions for Canada and Mexico rallied markets this morning.) The “Cohn Groan” selloff was in the wake of the resignation of a key advisor and Wall St. friend. Will this spur a retaliatory measure from the EU and Asia? Will this result in a full blown trade war? Markets don’t like uncertainty. When first announced, the tariffs caused the Treasury ‘s to plummet on a flight to quality. Then, this was followed by a selloff in bonds and rising yields as markets realized that trade wars / tariffs most likely will be inflationary. This week’s announcement of the actual policy will be closely watched, as will the identity of the successor of Gary Cohn.
Now, wage inflation: this Friday’s employment report will be closely watched. One month ago, the January employment report indicated spiking wage inflation and set the stock and bond markets on a roller coaster of volatility. This Friday’s wage inflation number should indicate whether it was an aberration or a trend. The Fed’s Beige book release today contains anecdotal economic data from each of the 12 Federal Reserve Districts. The report indicates tight labor shortages in certain markets. The wage inflation’s have not yet translated into higher prices for consumers. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
