Addiction
Addicted to spending, policy put strikes, weak labor demand but the Fed doesn't see it, yet...
This week’s note, following 3 days of meetings in NYC, focuses on the impact of government spending, tariffs, and labor market conditions. We begin with an assertion that a Fed policy pivot is more probable than a change of policy from the Trump Administration and Chair Powell was not swayed by Friday’s weak employment report. In short, the growth scare is likely to persist.
Fed Likely to Adjust Policy First: The Federal Reserve is expected to restart the rate recalibration process in May, with potential policy adjustments to stabilize the equity market amidst a weak February unemployment report, but not at the March meeting.
Economic Detox from Government Spending: Treasury Secretary Bessent emphasized the need for the economy to detox from its addiction on government spending. Bessent’s characterization is similar to the theme of our last two notes, Cleaning Up the Industrial Policy Mess and Anatomy of a Treasury Rally.
Tariffs vs. Government Spending: The impact of tariffs on the economy is smaller than the impact of reduced government spending, our meetings and conference observations suggest this is not a consensus view.
Weak Labor Market Indicators: The February Employment Situation report showed a significant increase in part-time employment and a rise in the U6 underemployment rate, indicating a weak demand. Additional indicators such as the work week, employment ratio, and labor force participation rate suggest ongoing economic weakness, with the hours worked GDP proxy tracking 1.2%.
Repudiating Merkelism & Mercantilism: Germany and China are responding to pressure from the Trump Administration, while we remain skeptical the governments are prepared to make effective structural changes, we are long their equity markets.
Investment Strategy Amidst Market Volatility: We suggest adding to financial and energy sectors while reducing healthcare and staples, given the Trump policy trade risk-off reversal market and policy outlook. The Treasury rally is likely to continue.
Measures of Risk, Positioning and the Week Ahead: The upcoming Job Openings & Labor Turnover Survey, Atlanta Fed Wage Tracker, CPI, PPI, and Treasury auctions are not expected to influence market perceptions of the Fed's policy stance. Equity market volatility market measures of stress are elevated, we explain the implications.