Week in Review
Strong economic data led the market to big gains this week, despite President Trump’s tariff announcement. The S&P 500 was up over 3 percent, while bond yields were quiet on the week. Volatility has indeed returned to the market with three-out-of-five days experiencing more-than-1-percent swings in value.
In a week that was notable for President Trump placing tariffs on steel and aluminum imports, it was the monthly jobs report that stole the show toward end the week. U.S payroll employment grew 313,000 in February and prior months were revised upward by 61,000. These were the best month-over-month gains since July of 2016. Participation rate, which has been stubbornly low this entire economic expansion, grew by .3 percent to 63 percent, which is at the high end of the range for the past four years.
The “boogeyman” from the last wage report was … wage inflation, which has been slowly accelerating the past several months. It hit 2.9 percent in January, which sent stocks tumbling over 8 percent the following week. The catalysts for market volatility were fear of impending overall inflation and a more aggressive Fed-tightening cycle. Today’s report showed wage growth of just 2.6 percent year-over-year.
Our belief is that the economy and wages will continue to grow this year. We do not believe wage inflation or the Consumer Price Index (CPI) will accelerate fast enough for the Fed to alter their gradual normalization of the federal funds rate. We believe that the Fed needs to continue their tightening cycle because the federal funds rate remains below inflation and our economy is growing fast enough. Thus, we no longer need the stimulus; rather, we anticipate three or four increases in the federal funds rate this year.
There’s a New Tariff in Town
President Trump announced a 25-percent tariff on steel, a 10-percent tariff on aluminum and exempted our NAFTA allies for the time being. In-and-of-themselves, these two tariffs will not have a huge affect on our overall economy, but they do increase uncertainty as to future retaliation from our trading partners. Gary Cohn leaving his role as director of the National Economic Council highlighted the friction within the administration regarding these controversial tariffs. As of today, we do not know the long-term effect of these actions, but we hope it is not the start of something more sinister for the economy … like a trade war.
Takeaways for the Week
o President Trump’s ill-advised tariffs shook markets early in the week
o The U.S. economy continues to grow at a “not-too-hot, not-too-cold” pace, which the markets welcome