Trump’s tariff threats stoke market uncertainty
Fresh threats from US president-elect Donald Trump to hike tariffs on China, Mexico and Canada have sent shockwaves to the risk environment into the new week, as markets now grapple with the uncertainty over whether more countries could also be in Trump’s crosshair ahead. Floating the tariffs as “one of his many first executive orders” suggest that trade restrictions may come much earlier than expected, although there are still much ambiguity over his recent statement.
A 25% tariffs on goods from Canada and Mexico seems more aggressive than the initial 20% blanket tariff mentioned, while an additional 10% tariff on Chinese imports seem to mark a step-down from his previous 60% tariffs threat on China, which may partly explain the resilience in Chinese equities today. If anything, his statement seems to offer more confusion for markets, with the US dollar paring earlier gains while Asian indices consolidate after an initial dip.
The economic data front will leave US core Personal Consumption Expenditures (PCE) price index on watch ahead, and with market rate expectations for December very much split, the data will be on watch to potentially drive some consensus.
What to expect for US core PCE price index this week?
The previous September read for headline PCE came in line with the 2.1% forecast, following a 2.3% advance in August. However, the core PCE was higher than expected, rising 2.7% versus the 2.6% consensus. The recent uptick in core PCE marks its first since August 2023, indicating that the last-mile inflation fight remains an arduous one.
Ahead, expectations are for US October core PCE to inch up to 2.8% from the 2.7% prior, while headline PCE may tick higher to 2.3% from previous 2.1%. Month-on-month, headline and core PCE are expected to remain unchanged, growing 0.2% and 0.3% respectively.
Another higher-than-expected read is likely to renew concerns around sticky inflation and see rate expectations lean further towards a potential rate hold from the Federal Reserve (Fed) as soon as the December meeting. One to note that the current core PCE read of 2.7% is already above the Fed’s 2024 year-end projection of 2.6%, so another lack of inflation progress will not justify further easing. Currently, the rates markets are pricing a 25 bp rate cut from the Fed in December at almost a coin flip (55% probability), which will leave sentiments highly sensitive to the inflation data to find a common ground.