Markets Grapple With Trade-War Concerns

Yields rise with tariffs again capturing headlines. President Trump delayed US tariffs on Mexican and Canadian imports today after the two countries pledged greater resources for border security. While tariffs are currently being used as a negotiation tool, yields climbed throughout the afternoon due to concerns that the tariffs will eventually become long-term measures, which could lead to increased inflationary pressures. The short end of the yield curve climbed closed ~5 bps higher while longer term yields rose 1-3 bps. Meanwhile, equities declined on the potential for global trade disruption, with the NASDAQ down 1.20% while the S&P declined by 0.76%.

Tariff-drama unfolds, and numerous questions linger. Markets spent the day digesting updates to President Trump’s long-awaited trade policies. After signing an executive order last Saturday mandating tariffs on trade with Mexico, Canada and China, the measures were delayed by one-month on Canada and Mexico after the countries agreed to step-up border protection measures, a key point underpinning the US justification for the tariffs. The delays were welcomed by markets during mid-day trading; however, they are temporary and a 10% tariff on Chinese exports is still scheduled to take effect tomorrow. President Trump has also escalated calls for EU tariffs, saying that they will “definitely happen.” While markets hope that a trade war will be averted, there are still lingering concerns that these early days will escalate, with the potential for far-reaching and long-lasting economic impacts.

Fed’s Collins says the central bank will try to ignore tariff-related inflationary pressures. Boston Fed President Susan Collins said today that the Fed will “look through” tariff-driven price pressures so long as longer-term inflation expectations remain “well-anchored.” She also added that the Fed’s response remains difficult to project given the unknown economic impact of Trump’s policies. Meanwhile, Collins said there is no “urgency” to cut rates again, reiterating the theme from last week’s FOMC meeting, where Chair Powell emphasized that the Fed will maintain a cautious approach to further easing. Atlanta Fed President Bostic added that he wants to wait “a while” before accommodating further, which will allow the central bank to “see what the 100 basis points of reduction that we did at the end of last year translates to in terms of the economy.”