More Carrot, Less Stick
March is going out like a lamb, Is this the end of the North American Trade Bloc?
“Inflation, both the consumer price and asset varieties, is always and everywhere a monetary, and a fiscal, phenomenon.”
The origin of this quote is Milton Friedman, The Grumpy Economist, John Cochrane, the author of “The Fiscal Theory of the Price Level, added the fiscal policy to the mix and the happy strategist (because he lives in Vail) added the asset price component.
Ironsides Macro on the Mining Stock Daily
Ironsides on the Schwab Network
The first link is a 34-minute discussion recorded on Thursday, the second is a 10-minute appearance recorded Friday morning.
This week’s note discusses the next stage of the growth scare that was increasingly evident this week, and could become undeniable, even to the FOMC, next week. We also dig deeper into the Trump Administration’s trade policy. We end the note with a tactical asset allocation recommendation.
The Growth Scare: The market reaction to the February income, spending and deflator report; Treasury curve bull flattening led by real rates, lower stock prices and wider credit spreads was consistent with our view that the risk policymakers should be focused on is employment and growth, not inflation.
Consumer Confidence and Spending Data: Consumer confidence has declined significantly, and spending data from January and February shows a sharp deceleration, GDP is tracking less than half the prior quarter’s rate.
Labor Market Outlook: Next week’s labor market data is likely to be weak, with the unemployment rate potentially rising to 4.25%, underscoring our view that while the labor market might be at levels considered to be full employment, low churn and weak demand for less skilled workers suggests it is unstable.
Monetary Policy: If the March employment report is weak as we expect, the Fed is likely to change their tone and begin open mouth operations. The markets are getting closer to our year end policy rate forecast.
Government Spending Impact: Government spending remains high, contributing to a significant deficit and indicating that growth is slowing even before spending cuts are implemented. In other words, the detox from the addiction to government spending hasn’t begun.
Trade Policy Concerns: The note discusses the President Trump’s antipathy towards a North American trade bloc NAFTA and USMCA were intended to create.
Regional Fed Surveys: With 4 of the 5 March Surveys having been released, expectations for orders, employment and capital investment dropped sharply to levels prior to the Fed easing and election driven optimism.