Markets

Week Ahead: Expect Tweets And Retreats, But The Numbers Still Matter

I cannot really express how sad it makes me to say this, but in a week that will see several speeches by FOMC members and the release of some crucial economic data such as trade figures on Wednesday and the January jobs report on Friday, it could still be that the most powerful short-term influences on the market will be the words and tweets of Donald Trump.

As I said on Friday, his threat, or I suppose for some, it is a promise, to place tariffs on imports of steel and aluminum imports this week goes beyond the politicians’ normal lack of real influence on the economy. It is politically motivated economic policy in the tradition of Communist and other dictators everywhere and has the capacity to do real damage to U.S. and global growth.

Still, even though they will garner a lot less attention than Trump’s tweets, the data will probably end up being more impactful in the long term. Already this morning we are seeing Trump react to the backlash among Republicans and others who see the relationship between free trade and prosperity, and offering a way out for the important U.S. allies who would be most affected. That should remind us that the words of politicians, and particularly of this president it seems, are just that: words.

These latest words demonstrate even further that last week’s announcement was in large part political theater. The conditions for avoiding the tariffs laid out this morning on Twitter include things completely unrelated to the tariffs such as a further crackdown on drugs from Mexico, and even the main, related condition, a “new and fair” NAFTA is sufficiently vague to allow some serious backpedaling even as soon as later this week.

The potential damage that could result from this policy is large enough that traders and investors must pay attention. It is possible that there will be a flip-flop of the flip-flop, but within a couple of days tariff imposition it seems to have moved from being a policy announcement to a vague threat that serves as a negotiating tool on other issues.

Despite the inconsistency, that should be comforting to investors, and it does allow them to focus this week on what is more important: the numbers.

The first significant release is on Wednesday, when we will get the International Trade Balance. In the circumstances, the trade gap will no doubt attract more attention than usual, and the deficit is forecast to widen from $53.1 billion to $55.1 billion. Hit or miss, the release will involve some big numbers, so will no doubt embolden the protectionists, but looked at in an historical context where the U.S. balance of payments has been negative since 1975, a period which has seen some of the greatest, fastest economic growth in the history of mankind, it is not a big problem.

Then, on Friday, we will get what has become the most important data point on the economic calendar, the jobs report. The pace of recovery from the recession has been measured in job gains, and the Fed have frequently cited unemployment as the key metric in determining the pace of rate hikes. Based on the ten percent drop in stocks following last month’s strong report we seem to have passed into that topsy-turvy land where good news prompts a selloff and as we have done so, the focus of traders and investors has shifted.

As the overall economy has improved over the last eight or nine years, Non-Farm Payrolls, the number of jobs added to the economy, has taken on less significance as has the headline unemployment rate. Those numbers are expected to be 205,000 (vs. 200k last month) and 4.1% (vs. 4.0%), once again indicating that the U.S. is effectively at or very close to full employment. What matters now though is how that is affecting wages. Average hourly earnings are forecast to drop on a month by month basis from last month’s 0.3% to 0.2%, with an unchanged annual rate of increase of 2.9%.

It is quite likely that as free trade Republicans state their case to President Trump and increase the pressure on him we will see some backtracking on tariffs, and if that is the case, it will be supportive of stocks. That would be aided by anything but a big increase in the trade deficit, so Wednesday’s release takes on an importance that the trade numbers have lacked in recent years.

The jobs report, on the other hand, is always important. This week though, it is not jobs per se that should be watched, it is wages. Even if Trump’s tweets and retreats lend support this week, further signs of inflationary pressure in the numbers will, as was the case last month, prompt some aggressive selling.

The overall message is simple. You cannot avoid the political rhetoric, nor should you, but a lack of consistency of message regarding tariffs and a reversal this week would come as no surprise. The talk will no doubt heat up when the trade numbers are released on Wednesday, but the job numbers, or more accurately the earnings numbers, on Friday will have far more influence on stocks. Decisions should therefore be delayed until that release, no matter how much chatter comes before.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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