The first week of a new month features the US jobs data. It is the most important economic report of a new month. It sets the broad tone for much of the economic data over the next several weeks, including consumption, industrial production, and construction spending. 

However, there are two reasons why it may not pack the punch it has in the past. First, the bar to dissuade the market against a 25 bp rate hike on September 26 is very high. The market has discounted about a 95% chance of a hike, up from about 82% at the end of July. The January 2019 fed funds futures contract, the contract that offers the best insight into the year-end rate expectations, was virtually unchanged in August, discounting a little less than a 2/3 chance of a December hike. 

Second, there are larger more powerful forces at work. Trade tensions are set to rise. The public comment period for the new tariff that the Trump Administration wants to levy on $200 billion of imports from China ends on September 6. The US President has made it clear that he intends to move forward as China has not signaled its willingness to change its behavior. China has responded by announcing that it will retaliate with tariffs on $60 billion of its imports from the US. Even if the tariffs are not implemented immediately, it will cast a pall over the investment climate.  

Trump also indicated that he will get around to addressing Europe’s unfair trade practices too. He dismissed as insufficient Europe’s offer, according to reports, to drop all auto tariffs. Europe is chaffing under a series of actions that the US has taken over the past two years, including pulling out of the Paris Agreement, slapping its steel and aluminum with tariffs justified on national security grounds, and the unilateral withdrawal from the treaty with Iran. Trump encouraged the UK to leave the EU and has offered France “a better deal” if it left too. At the end of last week, Trump again threatened to leave the WTO, “if it does not shape up.”  

Meanwhile, NAFTA negotiations were not concluded at the end of last week. Talks will resume the middle of next week. Canada appears willing to cede some market share to the US dairy industry, but it cannot accept the steel and aluminum tariffs and the weakening of the conflict resolution mechanism. However, the White House has gone ahead and notified Congress that it planned to sign a deal with Mexico in 90 days and Canada can “join if it is willing.” By informing Congress on August 31, it allows the current president of Mexico to sign the agreement before AMLO takes office on December 1.