The past week in the markets was not for the faint-hearted. Two primary catalysts for the return of sharply elevated market volatility emanated from the U.S. – Fed Chair Jerome Powell’s hawkish testimony in front of the US Congress, and US President Trump’s announcement regarding sizeable import tariffs on steel and aluminium. Equity markets were heavily pressured by both of these catalysts, while the US dollar jumped on Powell’s testimony but tumbled on the prospect of tariff-driven global trade wars.
Powell Testimony
Fed Chair Jerome Powell testified twice this past week – Tuesday in front of the House Financial Services Committee, and Thursday in front of the Senate Banking Committee. In his Tuesday testimony, Powell hinted that due to significant strides in the economy, strength in the labor market, higher wage growth, rising inflation expectations, and changes in fiscal policy, there could potentially be more rate hikes in 2018 than the three that were previously projected.
That pivotal hint once again drove up expectations of an accelerated rise in interest rates, boosting US Treasury yields back up to near multi-year highs and placing renewed pressure on stocks, while aiding in a sharp extension of the US dollar’s recent rebound. On Thursday, Powell reiterated much of Tuesday’s testimony, but also slightly moderated his comments in a possible bid to quell fears of potentially overheating wage growth and inflation, which have recently been a driving force in pressuring equity markets. Stocks gained some respite from these comments, but it was short-lived, as the overall tone of the testimony remained significantly hawkish.
Trump Tariffs
Also on Thursday, markets were rocked yet again by a new development from the Trump Administration. Trump’s protectionist trade stance has long been known – since his election campaign in 2016. This stance came in full view on Thursday, however, when the President stated that high tariffs – 25% on steel imports and 10% on aluminum imports – could be implemented as early as next week. Markets rapidly grasped the potential implications of these tariffs, and broad-based fears of resulting trade wars led to sharp slides for global equity markets and the US dollar. By the afternoon trading session in New York on Friday, stocks had attempted to claw back some of those losses but remained substantially volatile.
The Week Ahead: Italian Election, Central Bank Decisions, and US Jobs
Concerns about Trump’s tariffs and the possibility of sparking global trade wars are likely to continue dominating market action for now, but there will be many other potential catalysts for market volatility in the very busy week ahead.
First up, Italy’s upcoming general election, slated to be held on Sunday, March 4th, could make a significant market impact. A surprise result has the potential to prompt heightened volatility for the euro. This is especially the case since two of the primary political parties/alliances vying for votes are generally known to be Eurosceptic, or opposed to the EU’s perpetuation and expansion of power. Closely tied to this Euroscepticism is the issue of immigration, which is the dominant theme of this Italian election. In recent years, hundreds of thousands of economic migrants and political refugees have migrated to Italy, making immigration a particularly heated topic among voters and politicians. Also taking center stage in the election will be Italy’s massive public debt, and candidates’ calls for policies that will increase the country’s budget deficit even further. Any outcome of the Italian election that boosts the prominence of populist, Eurosceptic parties like the Five-Star Movement and/or Northern League, has the potential to place renewed and substantial pressure on the euro.
While the US Federal Reserve may now be out of the limelight for the time being, several other major central banks will come into sharp focus. The Reserve Bank of Australia issues its rate decision and statement on Tuesday, the Bank of Canada is up Wednesday, the European Central Bank announces on Thursday, and the Bank of Japan rounds out the busy week on Friday. The statements and decisions of the Bank of Canada and European Central Bank will likely be the most impactful of the four, as there are more uncertainties surrounding these two central banks with regard to their monetary policy and interest rate outlooks.
Finally, the US jobs report for February will take center stage on Friday. Given the recent market turbulence that was initially driven in part by higher-than-expected wage growth figures in the last jobs report, this piece of data will take on particular importance. Current consensus expectations for month-over-month average hourly earnings growth are running at +0.3%. The unemployment rate is expected to have fallen to an extreme low of 4%, and the headline non-farm payrolls is expected to have risen by around 205,000 jobs.
Along with equities, key currencies that are likely to experience significantly further volatility in the busy week ahead include the US dollar, euro, Canadian dollar, and Japanese yen.
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