Now it gets fun to think about how the burden of the tax gets born. Imagine you’re a retail company in the food industry, you import a major ingredient in your dip from your factory in Mexico. You now pay an $3+ tax on your $15 food item. Immediate question, can you raise the price such that consumers absorb it? If not, can you absorb the cost in your margin? Let’s assume you raise the price, but now you sell less quantity, is the knock on effect that importing less from Mexico leads to Mexican unemployment and political pressure on Mexico to act to secure the border, etc.? Is that the mechanism by which this accomplishes Trump’s border goals? Or does the exchange adjust to offset some of this tax? I think the policy goal is that potential for tariffed countries to see less U.S. demand which will pressure employment in those economies. The potential exchange rate implications like a weaker Peso is a double edged sword, it could keep exports competitive but could cause local inflation. How everything adjusts and whether Trump adjusts policy will be major question marks.
Speaking of inflation, Friday’s PCE data were in line with expectations, printing 2.6% YoY on headline and 2.8% YoY on core. We talked about some differences in CPI and PCE back on January 15th and it seems like some key questions remain around the direction of housing. That said, the real key question for inflation from here is around tariffs. While I don’t believe in the tariffs cause inflation story, I do believe that policy responses to tariffs can cause inflation and perhaps that even just the expectation of higher inflation can be potentially impactful to the economy.
We’ll start the week with the Dollar rising on the tariff news, DXY up at 108.50, USD:CAD up over 1.45, USD:MXN ~20.68. The S&P 500 sits at 6,040. The 2Y at 4.22% and the 10Y at 4.54%.
On the week ahead, Friday's jobs report is the data highlight, but will probably take a backseat to Trump’s policies. We also get a few important tech earnings reports in the mix and monetary policy from the BoE (likely to cut 25bps).
Monday: ISM mfg, Fedspeak
Tuesday: JOLTs, factory orders
Wednesday: Treasury Refunding Announcement, ISM Services, fedspeak
Thursday: BoE, jobless claims,
Friday: Jobs Day in ‘merica, UofM
XTOD: Honestly very patriotic of the Mavs to make sure Trump wasn’t responsible for the worst trade decision of the weekend
XTOD: Axios reports that U.S. Secretary of State Marco Rubio presented the President of Panama, José Raúl Mulino with an Ultimatum while meeting yesterday, that if Panama does not take “Immediate Action” to remove Chinese Influence from the Panama Canal, “then the United States will take measures necessary to protect its rights under the Torrijos–Carter Treaties.”
XTOD: I don’t know what’s most disconcerting: (1) that anyone should imagine the Trump gang capable of hatching so elaborate a plan; (2) that anyone should think the plan capable of accomplishing its end of de-dollarization; or (3) that someone might consider that end worthwhile.
XTOD: Nobody who’s actually good at making money needs to sell you a course on it.
XTOD: The ability to tolerate pain and long hours is the most dangerous thing you can have.
XTOD: “I thought fame and fortune would bring me happiness. But one day you wake up and realize they don’t. I still felt the same emptiness — only worse, because I couldn’t say, ‘If only I had this.’” -Madonna
https://x.com/WRGuinn/status/1885998256318021973
https://x.com/sentdefender/status/1886133926856454217
https://x.com/GeorgeSelgin/status/1886150113745059931
https://x.com/naval/status/1885783497601892782
https://x.com/Codie_Sanchez/status/1885698126226297266
https://x.com/BrentBeshore/status/1885370240529232370
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