Yield Curve Steepens After White House Confirms Tariff Implementation

Incoming US tariffs push term yields higher. Treasury yields were little changed throughout the morning despite the release of PCE data, the Fed’s preferred gauge of inflation. However, the yield curve steepened in the afternoon following confirmation from the White House that tariffs against Mexico, Canada, and China will be implemented. President Trump’s tariffs have been associated with longer-term inflationary pressures, pushing the 10-year yield to close 2 bps higher while the short end of the curve fell 1 bp.

Personal consumption expenditures (PCE) generally accelerated in December. All December PCE readings matched economic forecasts, with three of four measures accelerating from November. Core YoY PCE was the lone measure to avoid acceleration, having stayed flat at 2.8% price growth. The print did little to change rate cut expectations, though it did serve as another reminder that inflation remains sticky. While doves will point to slowed core consumer and producer inflation in December, the Fed’s rate cut timeline is unlikely to accelerate without continued signs of easing inflation.

Labor data looms next Friday. Rates soared to multi-month highs in mid-January after nonfarm payrolls climbed to 256k jobs added (vs. 165k expected) while the unemployment rate declined to 4.1%. Labor market resilience pushed market expectations toward only one rate cut in 2025, though Fed Funds futures have already reverted to pricing in 50 bps of 2025 accommodation. Nonfarm payrolls is expected to plummet to 150k jobs added in January while the unemployment rate is projected to remain at 4.1%. The NFP slowdown would be especially welcomed by the Fed as they look for more evidence that labor market-driven inflationary pressures are dissipating.