Markets Hope that US-China Tariffs are Largely Negotiation Tactics

Rates fall as China-US trade war ensues. Tariffs once again dominated headlines with the U.S.’ 10% tariffs on a wide array of Chinese imports taking effect today. China and President Xi Jinping responded with retaliatory measures that generally surprised as less extreme than expected, which fueled momentum that the tariffs will ultimately be used as a negotiation tactic rather than being prolonged, permanent measures. The sentiment contributed to a 1-5 bp decline in Treasury yields and an equity rally, with the NASDAQ leading major indices at +1.35% today. Most of the Treasury yield decline occurred before 10 AM EST while yields grinded another ~1 bp lower throughout the remainder of the session.

China responds to US tariffs with relatively subdued measures. China President Xi Jinping responded to the US with tariffs on ~80 products, which is expected to equate to only $14B worth of American products. That compares to ~$525B worth of tariffs imposed by the U.S., a sign that China will remain cautious with retaliation. China’s trade surplus means that a significant trade war could have magnified consequences versus the US. Larry Hu, head of China economics at Macquarie Group Ltd., said that “China is likely to respond to tariffs mainly through domestic stimulus” to avoid a trade war blow up.

Early labor data indicates continued slowdown. December JOLTS data released today showed there were 7.6mm job openings during the month, below expectations of 8.0mm and below November’s 8.156mm final result. The results follow three consecutive months of increases, marking the first monthly decline since last September. Lower JOLTS results suggest less demand for workers, and thus, cooler labor market conditions. In turn, today’s results were viewed positively by doves, though the labor market remains generally robust. Friday’s nonfarm payrolls and unemployment rate data will shed a greater light on labor market trends.