ON DECK FOR TUESDAY, FEBRUARY 11
KEY POINTS:
- Bond yields rise into Powell, post-tariffs
- Trump’s tariffs will spur full pass through into higher inflation…
- ...as even the US aluminum lobby says so...
- …and announcing them into Powell’s appearance wasn’t terribly bright!
- Canada, EU threaten retaliation
- Powell’s testimony will double down on patient messaging
Sovereign bond yields are moderately higher across major markets in the wake of Trump's tariff announcement last night and ahead of today's Powell testimony. Equities are flat to slightly lower across major markets.
Metals Tariffs to Spur US Inflation
Trump did indeed announce a 25% tariff on all imports of steel and aluminum in all forms effective March 4th. The executive order for steel is available now (here) but the one for aluminum is still pending. Trump is again abusing national security provisions claiming that imports are a threat to national security only so that he can bypass Congress. The move tears up past agreements, proving yet again that Uncle Sam’s signature isn’t worth much. Canada and the EU have both said they intend to respond in 'firm' fashion. The Canadian retaliation has already begun through various tactics including my family joining this trend by avoiding personal travel to the US this March break.
But there are significant question marks.
First, note that the March 4th effective date for the steel and aluminum tariffs from all countries—which heavily targets Canada given where the US sources its imports of the metals as illustrated in yesterday’s morning note—roughly coincides with the 30-day delay of the 25% tariff on all Canadian and Mexican exports to the US. When the US imposed steel and aluminum tariffs in 2018 they took effect immediately.
So, a key question is why the matching delay? Is this a hint at an off ramp on the universal tariff? Alternatively, are the steel and aluminum tariffs cumulative to the 25% on all Canadian exports or just cumulative to pre-existing levies on other countries? Trump had alluded to this issue in vague language last week.
Second, does the US have the ability to replace foreign imports? Trump made this factually false claim: “We don’t need it from another country. As an example, Canada. If we make it in the United States, we don’t need it to be made in Canada. We’ll have the jobs. That’s why Canada should be our 51st state.”
Dream on. But key here is that his own country’s industry is calling his bluff and backed by chart 1 that shows capacity use in the US mining sector is sky high.
Once one gets past the first two paragraphs in this release from the Aluminum Association in the US that basically suck up to Trump, the last paragraph is the key. They point directly to how much comes from Canada and how US-based aluminum smelters have no spare capacity and it would take "billions of investment over decades to make the US fully self-sufficient for its metal needs."
That means prices will go up on full pass-through effects. That benefits Trump's buddies in the sectors whose shareholders get a pay raise but at everyone else's expense.
And so I'll say it again, there is nothing more patriotic for American c-suites to do than to jack up prices on their fellow Americans. American businesses and consumers that use steel and aluminum should be taking out their anger on the domestic steel and aluminum producers who benefit from Trump’s tariffs at least in the short-term. It’s a lousy national industrial policy to stiff your own consumers that harkens back to the dark days of mercantilism.
Federal Reserve Chair Powell's Testimony to Double Down on Patience
The other main development will be round 1 of Federal Reserve Chair Powell’s semi-annual Congressional testimony (10amET). The first round is before the Senate Banking Committee and he’ll read a statement at the start and then go to tedious political rants by Senators and Q&A.
How misguided to announce inflationary tariffs on the eve of Powell's testimony but the US administration's communications are in disarray.
Expect Powell to double down on his guidance that ‘we don’t need to be in a hurry to adjust our policy stance.’ The new information for Powell since the last time he spoke will include the metals tariffs, probable retaliation, and a solid nonfarm payrolls report that beat expectations on net after including upward revisions. The 3-month moving average for payrolls is holding very firm at 237k and I think he’ll say the January gain of 143k was stronger than it appeared. Q4 GDP was also released after his last press conference and while headline was weaker than expected, details like consumption and final domestic demand were robust. Expect lots of questions on tariffs and probably the same answers.
More Fed-speak arrives with NY’s Williams (3:30pmET) and Governor Bowman (3:30pmET).
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