US: Focus on data and politics - BBH

Analysts at BBH suggest that the focus in the US is four-fold as US stocks sold off hard late yesterday and the S&P 500 may gap lower today.  

Key Quotes

“We identified the 2690-2700 area is an important test.  A break of it could see 2630-2660.  The US personal income and consumption data are important data points for the economy in their own right, especially given the big announcement of pay increases and bonus payments following the tax cuts.  However, we are less sanguine and look for softer incomes and consumption in January after 0.4% m/m increases in both in December.  The Fed's preferred inflation measure, core PCE deflator, is expected to be unchanged at 1.5% y/y.”

“The third focus in Fed Chair Powell's second leg of his testimony.  The prepared remarks are the same.  The questions are different.  Many understood Powell to be more concerned about "overheating" economy and have now priced in three hikes.  The odds of a fourth hike have increased.  Investors will be keen to see if Powell says anything to give the impression that he was misunderstood.”

“Fourth, the US will reported announce the imposition of the tariffs on steel and aluminum on national security grounds that have been discussed over the past several months.  While the aluminum foil and solar panel actions and pending intellectual property defense are arguably aimed at China, the steel and aluminum are more broadly aimed.  The WTO does allow protection of industries on national security grounds, but the area has not been robustly tested.  There is little doubt the US action will see a WTO challenge.  When the Commerce Department’s recommendation for tariffs was formally issued, the relevant industries saw equity price appreciation.  Note, however, that whatever higher prices result will be a transfer from the consumers of steel and aluminum to the producers.  Tariffs can also add to the upward pressure on prices.”

“Renewed US stock market sell-off spells trouble for EM equity markets and currencies.  Investors were basically forced to go long EM equities and EM FX when the US markets were rallying, but now we're going the other way again.  This current sell-off in risk feels like it has some legs.”