The Vote that Matters

As it turns out, market turmoil over the last few weeks may have some sway over policy, as the administration seems to be dialing back some of the tougher tariff talk. As long as this dynamic holds true, it could put a floor under the market. During every major selloff, there is a short squeeze that occurs after a selling climax that gives hope to the bulls for a move back to the old highs. We have discussed this at length. The question of whether this squeeze is short-lived can only be answered by further government follow-through.

Double Double Toil and Trouble

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There are two inherent flaws in Washington’s upcoming tariff strategy. Even if the rumors are true that there will be limited tariffs, the concerns are still valid. To understand them we need to recognize two undeniable economic truths: 

·   Tariffs slow growth.

·   Tariffs do not drive the trade deficit; only a lower fiscal deficit or higher savings can reduce our trade imbalance.

There’s the rub. As we discussed last week, the problem is that a slowing economy will not generate the increased direct foreign investment desired by our government. An economic slowdown will impede capital flowing into America as every global company and every government pulls back. Additionally, going back to Economics 101, our trade balance (exports minus imports) is a function of net domestic savings and net government spending. Therefore, if the country saves more and invests less, the trade deficit shrinks. However, having consumers curb demand by saving more is not fertile ground for a manufacturing capex expansion.

The government is trying to do the right thing in reducing the budget deficit to 3% of GDP. That will bring the trade deficit down and lower interest rates. Unfortunately, as the economy weakens from the imposition of tariffs, declining government spending will add even more downward pressure on the tariff-induced downturn.

The government wants a more level playing field in international trade, and understandably so. The silver lining would be that our trading partners announce tariff reductions by April 2, and the news over the weekend about limiting tariffs to certain sectors in only 15 countries makes that a possibility. However, if all is not sweetness and light on April 2, and tariffs are rolled out, then there may be no escape hatch for our economy. Unless the economy somehow grows as the government shrinks and consumers save more, we will end up with the unwelcome combination of tariffs and a persistent trade deficit. With the combative character of this administration, not getting the desired result could lead to heavier tariffs rather than their removal, placing us even deeper into a hole.

Powell: Caught in the Headlights

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We were right about Chairman Powell, but we fear he will be proven wrong. We wrote that last week’s press conference would “be a test of Powell’s recent optimism. He has helped the markets in the past, so we would not be surprised by a positive spin.”

Positive he was.

Not only did Powell downplay the risks of Trump’s trade war, but the Fed Chair also disagreed with his counterpart at the Bank of Canada, who said tariffs would disrupt global supply chains, pushing up prices and pressing down growth. There was not one mention of the phrase “stagflation” throughout the entirety of his press conference. When asked about the Fed’s 2025 forecast for lower GDP growth and higher core CPI, Powell replied that “you see weaker growth but higher inflation, they kind of offset.” No, Mr. Chairman, that is not how it works. That is the definition of stagflation.

NY Fed President John Williams spoke about the economic outlook two days later, and we were struck by the absence of the word “tariff” in his speech. The only thing Williams and Powell are certain about is that we are in a highly uncertain period. Considering each day brings a new tariff policy, perhaps silence is the most prudent path while the central bank waits for final details on tariffs. Equities experienced a relief rally on Powell’s “What, me worry?” message, and rallying more this morning in hopes for vastly reduced tariffs. However, to ignore the negative aspects of tariffs and, more importantly, refusing to discuss the potential policy dilemma of stagflation can be viewed as a disappointing display of leadership. 

China the Environmental Leader?

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The expansion of clean energy in China is staggering. China is thought of as a coal driven economy, with a reliance on energy imports, but the country’s incredible build out in battery storage has made it the dominant player in global clean energy storage. Battery capacity has expanded over 10 times since 2022, with 2025 expected to see an annual storage capacity increase of over 40%. This burst of supply has led many to forecast that the country will dramatically transition away from coal as batteries plus solar becomes cheaper than the fossil fuel this year. Beijing has rolled out new energy storage policies since 2017, with lithium-ion batteries the central focus. If batteries get so cheap, they can potentially replace hydropower over time, and the green energy sector could eventually fill in the economic gap created by real estate.

This is a remarkable shift as the U.S. is moving in the opposite direction. China’s interest may have been sparked by a need to increase energy security and self-sufficiency. We wrote about capital flowing out of the U.S. into China, with their technology sector being a major recipient of those flows. Their dominant position in energy could also see the U.S. importing even more batteries and possibly energy from China’s large-scale storage stations if we cannot generate sufficient power to meet our AI energy demand. Their foresight in creating a global clean tech industry edge could give them a leg up in the upcoming technology race and can help fuel even more investor enthusiasm for Chinese equities.

 What to Look for This Week

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(All times D.S.T.)

1. Tuesday, March 25 at 11:00 a.m., the Conference Board’s March Consumer Confidence Survey is released. February’s reading for the Expectations Index fell below the recession level of 80, dropping to 73. Any further drop will be seen as problematic, but the focus will be on three- and five-year inflation expectations that have been steady lately. A jump up would contradict Chair Powell’s assertion that it is only the University of Michigan survey that is showing a spike in expectations. The final figures for the University of Michigan survey are published Friday, March 27 at 10:00 a.m.

2. Wednesday, March 26 at 8:30 a.m. the February Durable Goods Orders report. The best view of business spending is the Non-Defense Capital Goods Orders Ex-Aircraft data series. This will be a gauge of whether businesses have pulled back on spending the month after President Trump went all-in on tariffs in January. The last three months had seen consecutive gains and January logged the highest annual gain (2.1%) for almost two years.

3. Friday, March 27 at 8:30 a.m. is the Personal Consumption Expenditure Price Index for February. Last month core PCE was soft at 2.6%, but estimates are for an increase to 2.8% based on last week’s CPI and PPI data. The Cleveland Fed’s Inflation Nowcast expects the February data to be unchanged at 2.6% for core.

FOMC Voters Speaking: Governor Michael Barr speaks twice next week on Monday March 24 at 3:10 p.m. D.S.T and Thursday March 27 at 12:15 p.m. Barr makes market moving comments despite the fact he is a voter, because his focus is supervision and regulation. Another board member, Governor Adriana Kugler, speaks before equity markets open on Tuesday March 25 at 8:40 a.m. Again, we are not expecting market fireworks. Tuesday March 25 at 9:05, NY Fed President John Williams speaks, and last Friday he mentioned he expects lower GDP growth due to lower immigration, failing to mention tariffs.

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