Macroeconomics: The Day Ahead for 27 March

A busy run of US statistics and a host of central bank speakers dominate the day’s schedule, though 25% US auto tariffs will be the central talking point, with particular focus needed on how the EU, Canada and Mexico respond in coming days. These have come as markets have been vacillating between fear and wishful thinking in a pattern that looked rather too much like Pavlov’s dog, above all given the complexity of this very long shadow over the world economy. The ‘wishful thinking’ (or if you will ‘optimistic spin’ on tariff wars or a potential ceasefire in Ukraine) is above all evident in the strength of demand for IG and above all HY Credit, with spreads still close to their recent cycle lows (see attached chart). There are China’s Industrial Profits to digest ahead of Brazil’s IPCA-15 inflation, and the US run of final Q4 GDP, Goods Trade Balance, Wholesale Inventories, weekly jobless claims, Pending Home Sales and KC Fed Manufacturing survey. Aside from ECB, BoE, Fed and Riksbank speakers and an expected no change rate decision in Norway, the US Congressional Budget Office (CBO) publishes its 30-year US Federal Budget outlook, which follows yesterday’s CBO estimate the US govt may run out of enough money to pay its bills on time as soon as August, if Congress fails to raise or suspend the debt ceiling.

** U.S.A. – Goods Trade Balance, Wholesale Inventories, Auto Tariffs **

While the focus will be on the impact of Auto tariffs, and Friday’s PCE deflators in terms of hard data, today’s advance Goods Trade Balance and Wholesale Inventories demand attention, the former expected to show a snapback in the deficit to $138.0 Bln from January’s record $-155.6 Bln as ‘tariff dodging’ imports ebb, while Wholesale Inventories are expected to jump 0.7% m/m. If correct this should see some improvement in the Atlanta Fed’s GDPnow tracker for Q1 from the current -1.8% (SAAR). As importantly, it implies that the impact of tariffs on inflation will likely be delayed with retailers and wholesalers well stocked, and doubtless hoping that some tariffs will prove to be ‘transitory’ before they are forced to pass through increased costs. As was the case with the 2021/2022 ‘team transitory’ on inflation, there is as Fed’s Musalem observed yesterday a need to focus on second-round effects of tariffs on inflation, rather than the immediate first-round impact – these above all will be dictated by the impact on automakers profits, which will not only pressure prices but also limit investment and damage supply chains for the sector (above all parts), they will limit choice for consumers, and Trump dangling ‘tax deductions’ for US made cars will simply not be a sufficient offset, and create a whole new level of bureaucracy. As is the case with so much of the Trumpian policy narrative, it suffers from the typical fault of Marxist analysis, the identification of problem areas is very sound and justified, the prescription to correct the problem is deeply flawed, and will in general only set off a further set of unintended consequences that will make the situation worse.