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A Lonely Landmine: Full Week Ahead Preview

Trade banter and CPI. That is all. Or at least all we know.

Well, as noted, you can expect no shortage of President Dennison in the week ahead as the ongoing tumult at 1600 Penn., the Mueller probe, and the porn star fiasco seem to have pushed Trump over the edge this weekend.

His Saturday rally in Pennsylvania was even crazier than everyone thought it would be and his Sunday tweets suggest he’s furious that someone leaked his meeting with Clinton impeachment attorney Emmet T. Flood.

All of that probably means he’ll be prone to erratic behavior when it comes to the fallout from the steel and aluminum tariffs.

“The repercussions of Trump’s tariffs remain to be seen, although the concerns about a trade war appear to have diminished following the inclusion of exemptions in the initial protectionist measures,” Barclays wrote over the weekend, adding that “further action is expected, as Trump hinted that new restrictions on Chinese exports may be announced amid an investigation about China’s intellectual-property practices.” That refers to rumors that the U.S. is said to be considering a broad crackdown on Chinese imports.

On Saturday, he tweeted this:

I’m not sure that helps this situation.

As Goldman noted on Friday, for now the fallout from the tariffs has been confined to “firms that [are] vulnerable to rising steel and aluminum input costs [which] have underperformed the Industrials sector by more than 300 bp in the last two weeks.” Any further escalation could see the pain spread, but the hope is that the exemptions announced on Thursday are indicative of a more conciliatory stance from the administration. Unfortunately, it seems as though Trump’s judgement on the trade front is clouded by his mood swings which are themselves a product of personnel problems at the White House. Those personnel problems are not going away.

The big number this week will obviously be CPI. It’s kind of the lone landmine out there. Last month, everyone was convinced the world would end in the event of a beat and indeed, futures crashed when the number came in hotter-than-expected. Recall the knee-jerk:

Dow

That was back when everyone was still shell-shocked from the selloff. The assumption was that following the AHE-driven rout in early February, any further sign that inflation was picking up would be met with even more selling, but those fears turned out to be unfounded.

We’re heading into the February CPI print with the exact opposite setup – that is, we’re riding a rally inspired by an AHE miss. Here’s Goldman’s take:

We estimate a 0.19% increase in February core CPI (mom sa), which would leave the year-over-year rate unchanged at +1.8%. Our forecast reflects strength in shelter categories and lodging away from home but also sequential deceleration in used car prices and a pullback in the legal services subcomponent. We do not expect a reversal of January’s sharp increases in the apparel category, which we believe reflected normalization in prices following a highly promotional holiday season. Similarly, we expect medical care prices to rise further, albeit at a slower pace. We estimate a 0.16% increase in headline CPI, reflecting a decline in utility prices.

And here’s BofAML:

Core CPI is likely to see a slower 0.2% (0.18% unrounded) mom gain in February, following January’s robust 0.3% (0.35% unrounded) pick up. This would allow yoy core CPI to tick up to 1.9% from 1.8% on a seasonally adjusted (sa) basis, but leave it at 1.8% nsa. The surprise strength in the last report was driven by particular gains in apparel and medical services, the former category sensitive to the residual seasonality phenomenon. This month, we expect a reversal in both, which will weigh on both core commodities and core services inflation. Transportation services are also likely to see a payback after an outsized gain in motor vehicle insurance drove the index higher in January. Elsewhere, we expect steady shelter inflation as tighter labor markets and gradually accelerating wages supports rents.

Although this doesn’t have the same air of urgency as it did last month, that may be a bad thing in the event we get an upside surprise – especially ahead of the Fed and in light of recent hawkish commentary from previously reliable dove Lael Brainard. 

Additionally, it’s time for the triple-whammy econ deluge out of China (i.e. retail sales, IP and FAI). These are always closely-watched, although there could very well be some lingering holiday distortions.

Elsewhere, Catalonia was supposed to elect a president this week and here’s Reuters with the punchline on that:

Catalonia has postponed until further notice the election of a new regional president after Spain’s Supreme Court ruled that candidate Jordi Sanchez would not be allowed to leave jail (where he’s awaiting trial on charges of rebellion and sedition) to attend a parliamentary session planned for Monday.

Oh, and watch the whole Japan “shunto” wage negotiation release on Wednesday.

The bottom line on Sunday evening is this from Bloomberg’s Garfield Reynolds:

There are still a handful of clouds on the horizon — including tensions between the U.K. and Russia, Italy’s messy politics and just how to trade Xi Jinping being made president for life –but the initial moves look clear. The markets look to have been granted at least a couple of days’ breathing space before the next potential volatility landmine — Tuesday’s U.S. CPI release.

Full calendar from BofAML

Calendar

 

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