Financial markets are caught in the grip of a deepening selloff after a string of Trump administration officials hit the Sunday talk-show circuit to defend the president’s tariff policies, forcing investors to further mark down US asset values and slash global growth forecasts. Equity futures are setting up for another 3-percent drop at the open, benchmark ten-year Treasury yields are holding below the 4-percent threshold, and the safe-haven yen and euro are outperforming their advanced-economy peers as traders seek protection against the building storm.

The administration’s messaging seems remarkably unified. Commerce Secretary Howard Lutnick said on CBS “The army of millions and millions of human beings screwing in little screws to make iPhones—that kind of thing is going to come to America,” and Kevin Hassett, director of the National Economic Council, told ABC “I would expect the jobs numbers are going to go up many more now that the tariffs are in place”. In an interview with NBC, Treasury Secretary Scott Bessent mentioned that more than 50 countries had reached out to start negotiations since Wednesday’s “reciprocal” tariff announcement, saying that the president “created maximum leverage for himself,” and noting that “short-term market reactions” from “organic animals” should be downplayed. “I see no reason that we have to price in a recession,” he said. Speaking with reporters on Air Force One, President Trump said “I don’t want anything to go down. But sometimes you have to take medicine to fix something.”

The policy changes announced last Wednesday are beginning to take effect. Baseline tariffs took effect on Saturday, subjecting the vast majority of imported products to a 10-percent duty, and higher “reciprocal” tariff rates of 11 to 50 percent are due to take effect on Wednesday morning. The effective rate on all imports will rise from 3 percent ahead of Inauguration Day to somewhere between 18 and 22.5 percent (depending on how ambiguities with respect to the “stacking” of announced levies are resolved).

Markets are reacting poorly. The selloff triggered by Trump’s announcement on Wednesday evening ranks as historically remarkable: based on data dating back to 1927, the two-day decline in the S&P 500 is the 16th largest on record*—and uniquely, it is the only one among the top 50 not associated with the Great Depression, a financial crisis, or the pandemic. Although Chair Jerome Powell on Friday said officials didn’t “need to be in a hurry” to loosen rates, futures markets are putting greater-than-50-percent odds on an emergency-esque move at the Federal Reserve’s next meeting in early May—up from less than 15 percent just last week—and at least four cuts are now priced in by year end.

Remarkably, the dollar continues to fall, defying economic theory and previous experience. As suggested last week, we think this mainly reflects a recalibration in relative expectations for growth and inflation across the major economies, as opposed to a meaningful reappraisal of the dollar’s role in the global financial system. Real yield differentials have narrowed dramatically against the greenback as investors have moved to price in higher import costs, a significant drop in exports, and weaker consumption and investment growth in the United States itself—all stemming from the fact that the country has declared a trade war against all of its major partners simultaneously**, exposing its own economy to shoulder the largest burden, in proportional terms.

However, when America sneezes, the world tends to catch Covid. Trade and financial linkages between the United States and the rest of the globe remain incredibly strong, and the second-round effects of a slowdown in the world’s consumer-of-last-resort have a long history of propagating across oceans at a delay. It is unlikely that this time is different, and if it is not different, the ‘dollar smile’ dynamic—which posits that the greenback tends to strengthen against other currencies when the American economy is either extremely strong, or extremely weak in comparison with its global counterparts—should begin to kick in.

The Canadian dollar looks vulnerable in the short term. Commodity prices are still plunging, with West Texas Intermediate crude now down more than 15 percent this month, Friday’s payrolls report showed the most significant contraction in jobs creation in three years, and uncertainty levels have soared to almost-inconceivable levels, with the Bank of Canada’s first quarter surveys—out later today—likely to show businesses and consumers reaching a state of paralysis in the face of the major questions facing the economy. The probability of a rate cut at the central bank’s April meeting has jumped to 65 percent, and could go higher in the coming days and weeks as incoming data confirms a slowdown.

But the Trump administration is also unlikely to stick to its guns. Pressure on the president to reverse course intensified dramatically over the weekend as markets plunged, with Bill Ackman—one of his biggest backers—saying this “is not what we voted for” and Stan Druckenmiller—a long-time Republican, Scott Bessent’s former boss at the Soros Fund, and one of the world’s most successful investors—noting “I do not support tariffs exceeding 10 percent”. It seems likely that tariffs could be delayed, or symbolic** deals could be inked with a number of the countries named in last week’s action in the coming days, helping to alleviate stress in financial markets. We wouldn’t rule out a dead-cat bounce in today’s session followed by a renewed selloff, and then an eventual capitulation that triggers another round of moves in currencies.

*A 90-stock index was originally constructed in 1926 by the Standard Statistics Company and was expanded to 500 in 1957 under Standard & Poor’s.

**Reductions in tariffs—particularly in countries like Vietnam—remain extremely unlikely to cut US trade deficits. Relative cost, wealth, and spending differences between the United States and the world are at fault for trade deficits, not tariffs imposed by poor countries on infant industries.