Stock-index futures are edging lower and the dollar is weakening once more as the initial optimism sparked by yesterday’s tariff reversal yields to a more measured assessment of the risks still facing the US and world economies. Equity futures are setting up for a circa-1.5-percent loss at the North American open, ten-year Treasury yields are stuck near the 4.3 percent mark, and the greenback is heading toward a third day of losses against its major counterparts. The safe-haven Japanese yen is in the ascendant, and the euro is climbing after European Union officials announced plans to postpone retaliatory measures against the United States, and the Canadian dollar is trading sideways while the Mexican peso and Swiss franc underperform their peers.
Equity markets staged their strongest intraday performance since 2008 during yesterday’s session when Donald Trump said he would temporarily shelve one of the more extreme aspects of his tariff plan, barely 12 hours after it was implemented. In a bombshell early-afternoon social-media post, the president said his so-called “reciprocal” tariffs on almost 100 countries would be paused for ninety days, but near-universal 10-percent baseline tariffs would remain in effect, and the tax imposed on goods imported from China would jump to 125 percent “effective immediately”. After a series of conflicting statements, administration officials later confirmed that Canada and Mexico would remain exempt from 10-percent levies, but are subject to the previously-announced regime, in which non-USMCA-compliant trade will be tariffed at a 25-percent rate, with discounts applied to energy and potash products. Steel, aluminum, and auto tariffs are still intact.
The president’s reversal is helping to allay investor fears of future, deeply market-unfriendly policy moves from the administration. Although some observers remain committed to the idea that a game of five-dimensional chess is being played out across the global trade board, most financial market participants are convinced that turmoil in government bond markets—which suffered neck-snapping volatility from Thursday through yesterday morning—and recession warnings from corporate executives—like JP Morgan’s Jamie Dimon—were critical in convincing the administration to back off. Implied volatility in the currency markets is sliding from its peaks as traders bet that the ‘Trump put’ exists, with a strike price determined by Treasury yields. As the political strategist James Carville once put it, “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate anybody.”
But the tariff headwinds facing the US economy haven’t dissipated meaningfully. With average trade-weighted tariff rates now standing at roughly 25 percent, the import tax burden remains at the highest levels in more than a century, particularly when calculated as a share of overall gross domestic product. Businesses expect profit margins to fall, consumers think living costs will rise, and economists see growth slowing as persistently-elevated uncertainty levels intersect with a less efficient tradeable goods sector to weaken overall activity.
To wit: relatively-restrained inflation numbers released this morning are doing little to allay market fears of a melt-up in prices. According to numbers published by the Bureau of Labor Statistics a short time ago, price growth cooled unexpectedly in March, with the headline consumer index falling -0.1 percent from the prior month—the slowest pace in nine months—while the core measure climbed just 0.1 percent. But inflation breakevens, which measure market expectations for price changes at various time horizons, show investors are still braced for an acceleration in the future, with the two-year measure remaining well above levels that prevailed ahead of the pandemic and the subsequent Ukraine war shock.
