Bond yields and the greenback are sitting on substantial gains this morning on the back of a report suggesting that the US could apply universal tariffs on its major trading partners, and after data released yesterday seemed to bolster the case for a slowing in the Federal Reserve’s easing cycle, triggering a pullback in market bets on rate cuts. The benchmark ten-year Treasury yield is sitting near 4.7 percent—roughly ten basis points above the Monday open—and global rates curves are climbing in sympathy with the US move, with British gilts selling off at the most extreme pace. After having fully unwound Monday’s tariff policy-related losses, the most widely-monitored dollar index is sitting on a circa-0.65-percent advance for the year to date, with corresponding foreign exchange losses largely concentrated in the Mexican peso, Australian dollar, euro, and British pound.

Contradicting Monday’s risk-positive piece from the Washington Post, CNN this morning said Trump is “considering declaring a national economic emergency to provide legal justification for a large swath of universal tariffs on allies and adversaries”. Universal tariffs on the scale being discussed would hit global trade volumes and damage growth across a range of major economies, while also generating potentially stagflationary outcomes in the United States itself, limiting the extent to which central banks can lower rates.

The article comes after yesterday’s press conference in which the president-elect doubled down on threats against the United States’ most dangerous geopolitical adversaries—Canada, Greenland, and Panama. Trump threatened to annex Canada using “economic force,” and said he wouldn’t rule out using military force to take Greenland and Panama before suggesting that he would rename the Gulf of Mexico to the “Gulf of America”.

According to a report released yesterday, US services sector activity climbed more than expected in December and a measure of underlying prices jumped to its highest level since early 2023. The Institute for Supply Management’s services purchasing manager index beat expectations in climbing to 54.1 in December from 52.1 in November—well above the 50 threshold that separates expansion from contraction—and the new orders subindex rose to 54.2 from 53.7 as respondents reported a generalised recovery in business optimism after a dip in the prior month. More worrisomely, the prices-paid subindex shot up to 64.4 from 58.2, reinforcing concerns about a stalling in services inflation.

But businesses may be front-running potential tariff increases in an environment favourable to margin expansion. A significant number of respondents reported higher levels of uncertainty related to tariffs, with some taking steps to diversify supply chains, others seeing purchasing decisions conducted on accelerated timetables, and others seeing pricing agreements put in place for shorter timeframes. This is consistent with what our own clients and partners are reporting.

And labour market pressures—which ultimately drive services costs—are still moderating. According to the separate Job Openings and Labor Turnover report, the number of job openings available jumped unexpectedly to 8.1 million from 7.8 million in November, but the share of workers who quit their jobs fell to 1.9 percent from 2.1 percent a month earlier, underlining a softening in perceived employment prospects. Although layoffs remained low at 1.1 percent for a third month, the hiring rate slipped to 3.3 percent from 3.4 percent, pointing to a gradual easing in demand for new workers.

This afternoon’s Fed minutes could shed light on how the central bank might react to changing economic conditions and policy shifts from the incoming administration in the year ahead. Market participants will scour the record of December’s meeting for insight into how the balance of opinion on the Federal Open Market Committee was tilted in favour of cutting rates at the time, and for details on the inputs policymakers used when updating their “dot plot” projections for the future. At the time, Chair Powell said “Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecast at this meeting and said so in the meeting. Some people said they didn’t do so, and some people didn’t say whether they did or not”. We think most participants adjusted their forecasts in line with an extension of the Tax Cuts and Jobs Act and a modest increase in tariffs on China, but doubt that the universal import taxes being mooted by sources within Trump’s policy team were fully priced into the Committee’s expectations for 2025 or 2026.

In a speech this morning, Governor Waller said he still expects inflation to cool over the year ahead, meaning that “more cuts will be appropriate”. He noted that the economy is still on a “solid footing”, and said “I have seen nothing in the data or forecasts that suggests the labour market will dramatically weaken over coming months”. “If, as I expect,” he said, “tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of monetary policy,”

But for now, however, it’s clear that we’re all living in Donald Trump’s world. For better or worse, rapidly-shifting and deeply contradictory signals from the motley crew of advisors surrounding the incoming president will take precedence over evolving economic fundamentals and speeches from policymakers in defining market outcomes over the coming weeks. Strap in for a wild ride.