Increasing turbulence as headwinds become tailwinds…
A combination of Jerome Powell's first major public appearance, and a typically Trumpesque announcement on steel tariffs, managed to further unsettle jittery markets overnight. As a result on the first day of March the US market declined for the third straight session,with the Dow falling 1.7%, and the S&P500 having declined 3.9% in February and when it moved more than 1% on 12 out of a total of 19 trading days, interestingly more often rising than falling when doing so.
Taking Powell's comments first - after all, they are likely to be somewhat more rational and considered than those of his Commander-In-Chief's. His comment that headwinds have become tailwinds set the tone, and as a result created headwinds for the market. Acknowledging that the FED's role was to create a balance between inflation ("expect to see it" increasing towards trend) and growth, Powell noted that while there was no evidence of overheating in the economy, US unemployment has fallen from 10% post GFC to its current level of 4.1%, with wages growth at only 2.5%, although he's also expecting that figure to increase.
What's always curious for those with grey (or no) hair amongst us, and those with memories of the '70's and 80's, is that the FED is actively trying to encourage inflation.
The market has little doubt that interest rates in the US will increase over the course of the year, with most analysts expecting at least three hikes, and possibly four, over the next 10 months. All eyes therefore will be on Powell's next major test, namely the FOMC meeting scheduled for 20th and 21st of March. Markets dislike uncertainty, and with the 10 year bond rate having climbed to within five basis points of the psychologically important 3% mark, the view remains that volatility will continue and the risk for both equities and bonds will remain on the downside. It is well worth remembering that for the last eight times when the FED has moved to a tightening cycle, lower P/E's have been the result.
Never one to be outdone, Trump (we'll resist any further "hair" comments as being a cheap shot) added fuel to the recent volatility by announcing a 25% tariff on steel imported into the US, and 10% on aluminium, each for "a long period of time". Even though steel and aluminium represent only a little more than 1% of overall US imports, the fear is probably greater than the fact. Trump is signalling, threatening or risking a trade war, or a response, particularly from China.
Watch this space.
