Market Brief: Dollar Retreats as 'Tariff Exhaustion' Kicks In, and Retail Sales Slump

The dollar is trading near a two-month low this morning after Donald Trump delivered a long-threatened “reciprocal” tariff plan that was distinctly short on tradeable detail. In an extensively-teased announcement from the Oval Office, the president signed a memo directing federal agencies to investigate raising import taxes on shipments from countries with “unfair” economic barriers in place against US exports—things like tariffs, regulations, subsidies, manipulated exchange rates, and domestic value-added taxes—but stopped short of imposing any deadlines or naming the product categories and countries that could be targeted. “On trade, I have decided, for purposes of fairness, that I will charge a reciprocal tariff, meaning whatever countries charge the United States of America, we will charge them—no more, no less,” Trump said.

Rightly or wrongly, fears of a global trade war are easing. According to Commerce Secretary nominee Howard Lutnick, his department’s analysis on trade barriers should be completed by April 1, but many investors now think the administration will use the findings as a pretext for a series of bilateral negotiations on individual tariff schedules—as opposed to the multi-front trade war that had been contemplated in recent weeks. Benchmark ten-year Treasury yields are down, equity markets are up, and measures of financial market volatility are well off their highs as "tariff exhaustion" kicks in. The British pound is trading near its highest levels this year, the euro is up roughly 0.2 percent against the greenback, and both the Canadian dollar and Mexican peso are adding to their gains ahead of the North American open.

Observers (including ourselves) are lacking a clear understanding of Trump’s motivations, implying that uncertainty levels could remain elevated—and revert back to their highs—in coming weeks. Yesterday’s press conference was laden with references to trade imbalances—as opposed to the fentanyl and illegal migration claims that animated previous threats against Canada, Mexico and China—despite the fact that tariffs have historically proven ineffective at reducing overall American deficits. Two things have made a dent in the recent past: recessions, and innovations in the energy sector.

American consumers cut spending more than expected last month, pointing to a deceleration in overall activity ahead as confidence levels slump. According to figures published by the Census Bureau this morning, so-called “control group” retail sales sales—with gasoline, cars, food services, and building materials excluded—tumbled -0.8 percent in January, substantially undershooting forecasts set at 0.3 percent. Total receipts at retail stores, online sellers and restaurants fell -0.9 percent on a month-over-month basis, following an upwardly-revised 0.7-percent gain in the prior month. Markets were expecting a 0.2-percent monthly headline contraction after a strong December.

The release came after inflation concerns receded somewhat from levels reached just after Wednesday’s surprisingly-hot consumer price print. Headline wholesale price growth was faster than expected in January, but the categories that feed through into the Federal Reserve’s preferred inflation indicator—the core personal consumption expenditures index—were generally softer, helping put downward pressure on expectations for the release later this month. Market-implied forecasts for the number of rate cuts over the next year were reverting lower as we went to print.

A slowing disinflation process is likely to keep the Fed sidelined for now, but the headwinds facing the US economy are growing, and a return to faster easing can’t be ruled out. A number of indicators are pointing to higher uncertainty, weaker investment, and a slowing in the business cycle, but we’re also keeping an eye on the new administration’s impact on labour markets, where cost-cutting plans could cause jobless rolls to jump in coming weeks. Although the federal government (excluding postal workers) employs just 1.5 percent of the total US workforce, Elon Musk’s “Department of Government Efficiency” reportedly plans to lay off several hundred thousand people, meaning that at least one surprisingly-weak nonfarm payrolls report could be in the offing.

*Please note: we will pause distribution on Monday as US markets observe the President's Day holiday and Canadians celebrate Family Day. The morning Market Brief will return on Tuesday, February 18. Enjoy the long weekend!

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