With the Fed behind us, next up is the core PCE reading at the end of the week

Outlook

Today the data releases are mostly PMI’s, including from the UK and US. In the US, it’s the S&P PMI, which plays second fiddle to the ISM version. We also get the Chicago Fed Feb business survey. Then it’s one thing right after another--see the Econoday calendar.

With the Fed behind us, next up is the core PCE reading at the end of the week. As noted before, the latest data is failing to show crisis conditions. The PCE will not exactly be a crisis number, but it will be higher.

Also in the mix is the dawning realization that next week is the start of Trump’s tariffs. Tariff fear periodically gives way to tariff fatigue, but this time it’s not an announcement effect, but the real deal. Even Trump supporters admit that “liberation day” (April 2) mean liberation of money from consumers’ wallets, aka a tax.

Now we see a retreat from all tariffs on everybody—gee, maybe some exceptions. Some expected this all along—the tariffs are not a real threat, just a negotiating ploy—and while that may be true at least in part, it’s no gold star for Trump.

Deliberately causing disruption and damaging uncertainty is a lousy way to run anything, let alone the US government. And there’s a good chance he is talking about exceptions solely to get the stock market back. He and the Commerce and TreasSec have all said they are not mindful of the stock market this time (as Trump was in the first administration), but that cannot be true when the crash has gone so far. Some analysts go so far as to say the seeming change of heart is targeted specifically to Tesla.

Forecast

For forecasting purposes, too much depends on the verbal garbage spilling out of the White House. A week before the giant tariffs are due to hit, the White House is talking about exceptions.

The return of tariff uncertainty is bad for the dollar. The return of exceptions is good for the dollar.

Hard data and even the Fed are on the bench and not in play. One report has it that Mr. Powell downplayed the negative aspects of last week’s regional Fed reports. It was not the top headline. Still, the hysterical are being replaced by the “not so bad” crowd, so sentiment is still in a roiling process of forming.

It’s fun to see the crowds of voters in town halls and elsewhere protesting the Trump mismanagement and also the fire-bombing of Teslas, but this is show business, not real economics and not to be confused with decision-making about capital investment or consumption. Wait for the new Atlanta Fed GDPNow on Wednesday.

Tidbit: Of the plethora of papers on the dollar’s position as the top reserve currency, Reuters notes a 2022 paper by a Fed economist pointing out that “that roughly three-quarters of foreign official holdings of U.S. assets are with countries that have military ties to Washington.” 

Well, yes. US allies tend to be the richest countries, like Japan. Even a non-ally has a lot of dollar reserves (China).  The author wrote that “in scenarios involving highly fractious geopolitics, the risk of dollar reserve divestment represents about $800 billion - or just over 6% of the dollar's share of total reserve holdings. ‘Even a geopolitically-motivated move away from the U.S. dollar in trade invoicing would only diminish the dollar’s role as a reserve currency and not destroy it.’"

Ah, but imagine the announcement effect if the EU were to cut back, or even a big name like Norway or one of the oil-rich states. And if Europe really does ramp up military spending to rival the US, supplemented by the big Eurobond, does the euro not get a higher ranking as a reserve currency?

We’d like to add that historically, it’s not just top military might that determines the reserve currency. The numeraire for international trade is selected by the merchants on the basis of liquidity, universal acceptance, etc. Then governments step in to use that numeraire for reserves in case they need instant money to buy food or arms. The US still leads on that front. Can the euro gain a bigger share? You bet.

The core idea is hegemony, meaning leadership arising from power but also from consent. If the US refuses to use power to defend others, it loses consent and leadership is sought elsewhere. Right now it looks like Europe has the noble principles Trump is drawing away from, putting them in the lead to replace the US as the top hegemon, but consider the  history of Europe and the many, may wars they fought against each other. Europe would really have to prove it and that’s not going to happen fast.

Then there is the problem of Trump giving away power. Does that sound right? No way! He will grab it back and pretend he never intended to withdraw in the first place. The first thing to know about him is that he lies. Then when he changes the lie, he pretends it was a negotiating ploy all along

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