Steeling the Show

Financial markets experienced a flight to safety today after President Trump unexpectedly announced his plan to impose tariffs on steel and aluminum imports.  His pledge to enforce a 25% tariff on steel imports and a 10% tax on aluminum imports rattled the stock prices of automakers while boosted shares of metal corporations.  Following the news, investors immediately flipped into risk-off mode with the potential for a global trade war to ensue.  The decision was viewed as controversial by officials both inside his administration and those around the world.  “These U.S. measures will have a negative impact on trans-Atlantic relations and on global markets,” stated European Trade Commissioner Cecilia Malmstrom as she weighed in on the future trade outlook.

US Treasury prices surged during the trading session, with yields/swap rates declining 3-6bps across the curve.  The 10-year note yield now rests near 2.81% after touching as high as 2.95% just a week earlier.  All three major US stock indices posted steep losses, with the DJIA tumbling 1.7%, while the S&P 500 and Nasdaq fell 1.3%.  Crude oil prices continued their slump, as WTI futures declined 0.4% to $61.40/barrel.  The US dollar also did not respond favorably to the announcement, losing 0.3% against major currencies.

 

 

Robust Economic Data Gets Overshadowed

The Commerce Department’s report on personal income and consumer spending for January led a strong day of economic data reporting.  Detailed in the report, personal income rose a solid 0.4% last month (beating estimates of +0.3%), while consumer spending, which accounts for more than two-thirds of US economic activity, grew at a tepid 0.2%. During the same time period, Americans’ personal saving rate increased 0.7% to 3.2%, boosted by the recent tax cuts.  Inflation data in the report showed consumer prices increasing at a steady clip as the PCE index, the Fed’s preferred measure of inflation, increased 0.4% in January, yielding a 1.7% annualized rate.  The core PCE index managed a 0.3% rise MoM and 1.5% YoY.

 

 

Today’s release of the Institute for Supply Management’s index of factory activity showed a third consecutive month of robust US manufacturing activity during February.  The 60.8 level exceeded expectations of 58.7 and represented the highest reading in 14 years.  Order data accounted for the majority of the strength in the headline figure, with backlog orders rising to a 59.8 reading – also a 14-year high.

 

 

Other key economic data releases included a report from the Labor Department which showed initial jobless claims in the US falling to the lowest level since December 1969.  The number of new claims for the week ended February 24th declined 10,000 to a seasonally adjusted 210,000 (225,000 expected), and the four-week moving average of claims decreased by 5,000 to 220,500.  Also detailed in the report, the number of continuing claims increased by 57,000 to 1.93 million for the week ended February 17th.           

 

 

Volcker Rule Back in Scope

In regulatory news, the Volcker Rule is back in the spotlight after Fed Chairman Powell stated that they are “taking a fresh look” at the regulation.  Congress is currently reviewing a bill that would exempt banks with under $10 billion in assets from all aspects of the rule.  Currently, lenders with less than $10 billion in assets are only subject to the “light” requirements of the regulation, however, gaining a full exemption from the Volcker Rule would be a welcome change.  Larger banks are also soliciting change and it is likely that revisions would include some relief from parts of the rule.  Proposals are expected from the regulatory agencies in the new few months.