Chinese Trade War Escalates as Other Nations Hope for Reprieve

Rates fall on inflation data, further tariff developments. This morning’s CPI data fueled a 7 bp decline at the short end of the yield curve alongside growing odds for rate cuts. Clarification from the White House that tariffs against China are now 145% and China’s move to restrict American film imports further contributed to the decline at the short end of the curve. Meanwhile, the long end rose 7-13 bps, reflecting increased US growth and inflation expectations that stemmed from expectations for more near-term rate cuts. The spread between 2-year (3.86%) and 10-year (4.43%) yields is now +55 bps after yesterday’s ~15 bp flattener. Meanwhile, equities reversed course, with the NASDAQ and S&P 500 down -4.31% and -3.46%, respectively.

China becomes focus of trade war. What seemed like a global trade conflict appears to be morphing into a narrow focus on isolating China. In turn, China is digging in for a prolonged battle with the U.S. which has dampened hopes that a near-term trade settlement will be reached between the world’s two largest economies. U.S. tariffs on China now sit at 145% per a recent update from the White House. In response to the tariffs, China announced today it will limit the number of U.S. firms that can do business in the country, continuing the escalation. Goldman Sachs economists recently cut their 2025 Chinese GDP growth forecast from 4.5% to 4.0% in light of recent developments.

CPI hits multi-year lows. Core YoY CPI hit its lowest level in four years, having slowed to 2.8% from 3.1% in February. All readings were below forecasts, with core MoM CPI at 0.1% while the headline MoM reading showed a -0.1% decline in prices. The data spurred bets for earlier rate cuts, with markets hopeful that the Fed prioritizes a potential economic slowdown over elevated price pressures. However, the Fed is likely to take the data with a grain of salt; broader tariffs were only recently implemented, and the effects are unlikely to have been fully felt in March. President Trump’s 90-day tariff delays were a positive sign, but failed negotiations could lead to full reimplementation. Tomorrow’s PPI data will be the next input as the Fed mulls its path forward.