- Trump announced duties on imports from Canada, Mexico and China.
- A global trade war will hurt the global economy, impacting even the US.
- The outlook for US monetary policy has grown more dovish in recent weeks.
Equities collapsed as market participants worried about trade wars ignited by Trump’s tariffs. On Tuesday, the US implemented a 25% tariff on imports from Canada and Mexico. Moreover, there was an additional 10% tariff on Chinese goods. This overshadowed an increase in Fed rate cut expectations due to recent downbeat economic data.
Trump dashed hopes for further tariff delays when he announced duties on imports from Canada, Mexico and China. All these countries have vowed responses, with China imposing a similar tariff on certain US imports starting on the 10th of this month. Moreover, markets expect a reciprocal tariff to begin in April and affect more countries.
A global trade war will hurt the global economy, impacting even the US. Therefore, risk appetite dropped, and investors dumped risky assets like equities, opting for safer ones. If Trump continues this trend, more nations will suffer tariffs, worsening the outlook for the global economy and equities.
Meanwhile, market participants also focused on the outlook for US monetary policy, which has grown more dovish in recent weeks. Data from the US has shown some softness, raising Fed rate cut expectations. Last week, the US released its unemployment claims report, showing an unexpected increase. Jobless claims rose to a two-year high of 242,000, well above estimates of 222,000. This increase was a clear sign that demand in the labor market has dropped. As a result, Fed rate cut expectations increased.
At the same time, the core PCE price index report came in line with expectations. Inflation increased by 0.3%, as expected. However, the report also revealed an unexpected decline in consumer spending that raised a red flag.
Consumer spending drives a considerable part of the US economy. Therefore, weak consumer spending indicates a weaker economy, putting pressure on the Federal Reserve to lower borrowing costs. By the end of the week, market participants were pricing a 79% chance of a rate cut in June.
US manufacturing PMI (Source: Institute for Supply Management)
Furthermore, data on Monday revealed a decline in business activity in the US manufacturing sector. The ISM PMI fell from 50.9 to 50.3. Meanwhile, economists had expected the figure to drop to 50.6. Equities shine in low-interest-rate environments. Therefore, an increase in rate-cut bets should be bullish for stocks. However, all focus now is on Trump’s tariffs.
