President Trump Announces Additional Tariffs While Markets Look Ahead to PCE

Rates fall late in the session on tariff talks while Nvidia spurs an equity sell-off. Treasury yields declined ~5 bps this afternoon following clarification from President Trump that 25% levies against Canada and Mexico will take effect on March 4th, while the US will impose additional 10% tariffs on China. Prior to the past few weeks, long-term rates typically increased in response to higher tariffs, as investors worried about inflation. However, the recent flight to quality suggests a shift in sentiment, with markets now more concerned about the risk of a prolonged economic downturn. The short end of the curve closed 1-2 bps lower while the long end closed just 1-2 bps higher after the late session decline. Meanwhile, Nvidia plummeted nearly 8.5% today following yesterday’s after-hours earnings report, with fourth quarter sales topping estimates by the smallest margin since February 2023.

GDP growth was unchanged per the latest estimate, but quarterly PCE ticked higher. Second estimates of Q4 GDP growth were unchanged, with the economy expanding 2.3%. Consumers powered the advance, with personal consumption being revised slightly higher from 4.1% to 4.2% despite sticky inflation; quarterly core PCE was revised slightly higher from 2.5% to 2.7%. Overall, the report illustrated last year’s recurring narrative of a solid economy supported by robust consumption. However, in light of worries about tariffs, diminished confidence in the job market, and a growing sense of overall uncertainty, the outlook is gloomier – GDP is expected to grow 2.3% during 2025 versus last year’s 2.8% full-year estimate.

Tomorrow’s PCE slate is expected to produce mixed results. Core YoY PCE is expected to slow to +2.6% in January, which would be tied for the lowest level since March 2021. While the deceleration would rekindle optimism that inflation is on track for the Fed’s long-term goal of 2%, market reaction could be more muted than in the past due to shifting concerns toward an economic slowdown. Furthermore, core MoM PCE is expected to accelerate to 0.3% from 0.2%, which would be tied for the highest level since January 2024.