I see the beginning of two weeks of extraordinary volatility.
Look what’s on deck.
On Tuesday, March 4, President Donald Trump will give his first joint address to Congress–it’s not officially a State of the Union address because newly elected presidents don’t give State of the Union addresses. I expect a lot of rhetorical doubling down on the mass deportation of migrants, on firings of federal employees, on the shift in policy on Ukraine, on the need for a renewal of the big 2017 Trump tax cuts, on the need for higher tariffs–and other initiatives that make the financial markets nervous. It would be nice to hear a cogent policy to address the economy’s problems–slowing growth, and signs of renewed higher inflation–but I don’t expect to hear that. Of course, there will be lots of call-outs of President Trump’s enemies.
Also on March 4 the United States is scheduled to implement higher tariffs on imports from Mexico and Canada of 25% and an additional 10% tariff on imports from China. How much of what’s been promised will actually occur is an open question. My calls is that Mexico and Canada will be ablate postpone their tariff increases yet again by promising to raise their tariffs on their imports from China by 10% to match the new U.S. rates on China. That would only work if the United States went ahead with its plans to raise tariffs on China. My prediction is that the China tariffs will go ahead. Wall Street will not be amused–although there will be relief if the Mexican and Canadian tariffs are delayed again.
On March 14, the U.S. government’s spending authority runs out. And the federal government will not be able to pay workers or contractors, and agencies such as the IRS would largely stop work. (Interest payments on Treasury bonds and Social Security payments would continue.) So far, the Republican-controlled House and Senate have not aired on a framework for a spending extension. (Remember we’re talking about a renewal of temporary spending bills for the 2025 fiscal year that began on October1, 2024. The budget for the 2026 fiscal year that begins on October 1, 2025 is not even on the table yet.) The budget framework passed by the House includes massive spending cuts to programs such as food stamps (now called SNAP) and Medicaid that assure no Democrats will vote for a bill along these lines. The cuts may be deep enough to cost the slim Republican majority the needed votes, and yet they may be too small to keep deeply conservative Republican deficit hawks on board. The clock is ticking and the odds of a shutdown are actually higher than in the last two crises.
On March 19, the federal Reserve meets on interest rates and to update its the December projections in its Dot Plot predictions for interest rates, inflation, unemployment, and economic growth for 2025 and 2026. Despite signs that the economy is slowing, signs that inflation is picking up again–plus uncertainty about the effects of mass deportations and tariff increases on inflation–are almost certain to keep the Fed from cutting rates at this meeting. The CME FedWatch Tool put the odds of the Fed keeping its benchmark interstate steady at the current 4.25% to 4.50% range at 93% on Friday. The financial markets have, probably, priced in that no-action probability. But the Dot Plot projections could offer a surprise if they confirm the current one-or-none prediction for further interest rate cuts in 2025 and/or show the Fed expecting higher inflation for 2025.
And this list only takes us through the middle of March or so. There’s more potential volatility ahead in April with a possibility of a round of higher reciprocal global tariffs and the beginning of a potentially disappointing first quarter earnings season.
In the month of February the CBOE S&P 500 Volatility Index was up 18%.
