Morning Bid: US policy fog spells trouble

For the economy, that’s proving toxic. A hiatus in business and household decision making marks the biggest threat to the lengthy expansion and still-expensive Wall Street.

Business and consumer surveys suggest it’s getting harder to understand what prices or policies will prevail moving forward and are likely seeing projects, employment, deals and investments postponed until the coast clears. Whether it will ever truly clear during this government is now a salient question.

ISM’s February survey of manufacturing firms showed both new orders and employment readings slip back into contraction mode after post-election buoyancy, while tariff-irked inflation expectations are back on the rise. S&P Global’s poll of businesses in the U.S. dominant service showed overall activity turned negative last month for the first time in 16 months.

In some cases, the uncertainty is skewing behaviour to such a degree that it’s weighing directly on key components of gross domestic product calculations.

Net international trade, for example, is a major input into GDP math. But as U.S. firms rushed to frontload imports to dodge looming trade tariffs on goods from abroad, the trade deficit jumped as a result – sending GDP estimates into tailspin.

Loaded into the closely-watched Atlanta Fed ‘GDPNow’ model, the net exports variable posits the first quarterly contraction in overall U.S. GDP in nearly three years.

While some dismiss the number as a statistical glitch, it’s still alarming for an investment universe that convinced itself the business cycle had died and which has priced most U.S. securities accordingly.

And a problem for those who think tariff distortions will wash out of the mix soon is Trump’s seeming intention to keep ever higher and broader tariffs dangling indefinitely.

MORE THAN IT CAN STAND

Combined with the uncertain impact of slashed Federal government spending and public sector job cuts, even those who consider the Atlanta Fed’s red flag to be a false one also think it’s ominous as a precursor to the real impact of both the tariffs and government cuts.

UBS Global Wealth Management’s U.S. economist Brian Rose described the GDPNow swoon as “noise rather than a signal” – but he added that this week’s planned tariff hikes on Canada, Mexico and China were real cause for concern.

“If implemented, these tariffs would deliver a significant shock that may be more than the economy can withstand at the moment.”

Other relatively bullish Wall Street investment houses are similarly antsy about the recent turn in sentiment.

Morgan Stanley economists on Monday said some of the sudden gloom may be overdone but the uncertain sequencing of U.S. policies was a worry.

Their point was that policies that soften growth and firm inflation – on trade tariffs and immigration curbs – look set to come first and policies that could boost growth, like deregulation, come later or “maybe not at all” in the case of tax cuts.

And it said the spending cuts underway were in areas with “high multipliers”, adding that announced layoffs may reduce federal employment by 31,000 per month through September and a proposed hiring freeze may cut employment by a similar amount.

In a week where markets are now watching the February monthly payrolls report with an element of nervousness, those numbers will resonate.

And with Wall Street in the peculiar position of finding many of its main stock indexes in the red for the year going into March, there is a lingering concern that market turbulence will drain household and business confidence further.

Even for those who think America’s economy can still be a relative winner from all the trade tensions and policy upheavals, there’s a reminder that global economic damage can boomerang on it. Some 41% of overall revenues from the S&P500 firms are sourced overseas, according to Apollo chief economist Torsten Slok.

Today’s key chart

Washington’s freezing of military aid to Ukraine overnight and Europe’s commitment to pick up the tab in support of Ukraine are set to be key drivers of financial markets this week. German and European defence stocks have soared and the euro has risen amid hopes for an economic boost from rapid rearmament.

Today’s events to watch

* U.S. import tariff hikes against Canada, Mexico andChina * New York Federal Reserve President John Williams andRichmond Fed President Thomas Barkin speak * US corporate earnings: Crowdstrike, Target, Best Buy,Autozone, Ross Stores and Progressive

(By Mike Dolan; Editing by Anna Szymanski and Ed Osmond, mike.dolan@thomsonreuters.com)