Highlights
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Jerome Powell’s congressional testimony and President Trump’s tariff announcement triggered inflation worries and caused a setback for stock prices.
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We think inflation pressures are rising, but they should not cause a significant equity market downturn.
- Nevertheless, volatility is likely to remain elevated until we see more clarity from bond markets and inflation data.
Early last week, investors focused on new Federal Reserve Chair Jerome Powell’s congressional testimony in which he seemed to imply that the Fed would be more aggressive about raising rates. While he walked back some of his statements later in the week, stocks reacted negatively to his comments. Equity markets were further hurt when President Trump confirmed speculation that he would announce tariffs on steel and aluminum imports despite the objections of some of his leading policy advisors. The S&P 500 Index fell 2.0 percent for the week, with the materials and industrials sectors faring the worst.1 At the same time, Treasury yields declined as investors sought relative safe havens.1
Weekly Top Themes
1. President Trump’s tariff announcement triggers several concerns for investors. The main worry for financial markets is the prospect of retaliatory action from other countries that could trigger, in the president’s words, a trade war. From an economic perspective, investors are also concerned that such tariffs could cause price increases for a variety of products, including cars, construction materials and some consumer goods.
2. Fed Chair Powell’s comments raised the possibility that we could see four interest rate hikes in 2018. Powell highlighted the strength of U.S. economic data, confidence that inflation is firming and an overall favorable global macroeconomic backdrop.
3. A tightening labor market is likely to contribute to inflation fears. Last week, initial jobless claims fell by 10,000 to 210,000.2 This represents the lowest level since December 1969.2
4. We expect the February payrolls report to echo this theme. Current consensus estimates suggest that payrolls climbed 180,000 or higher and that the unemployment rate fell to 4.0 percent.3 In addition, average hourly earnings likely rose around 0.3 percent, keeping the year-over-year gain close to 2.9 percent.3
5. Rising deficits are likely to grow in importance in investors’ minds. Higher deficits would increase the supply of Treasuries, putting additional upward pressure on rates. Additionally, we think deficits will increasingly become a source of fiscal policy debate in the coming years.
We See Reasons For Optimism, But Also Several Rising Risks
Financial markets remain uneasy, and we believe the volatility that started in early February is not yet over. Bond yields remain in flux and prospects for sharp increases are keeping equity markets on edge. Investors are also anxious about a profound shift in the macro environment, as inflation pressures are on the rise. President Trump’s tariff announcement added fuel to the fire.