The Tariff Tantrum continues. – The Daily Tearsheet

Vital Statistics:

Stocks are lower as investors continue to fret over tariffs. Bonds and MBS are up, and the 10 year traded at 3.9% in the overnight session.

The week ahead will be dominated by the continued market reaction to tariffs. In terms of economic data, we have the Consumer Price Index and the Producer Price Index and Consumer sentiment along with a slate of Fed speakers. Finally earnings season kicks off on Friday with many of the big banks reporting.

With the decline in the stock market, we are starting to see some movement in the Fed Funds futures as the May futures now have around a 50/50 chance of a rate cut. The December Fed Funds futures now see 4 as the most likely case and 5 as the next most likely case. The Fed Funds futures may be simply following the stock market, of course. We know the Fed considers the neutral rate (i.e. r-star) to be around 3.25% or so. This means they need to cut rates about 100 basis points in order to get to neutral, and if the economy heads into a recession they will need to cut more. So start thinking about the possibility of a 3% Fed Funds rate and sub-6% mortgage rates.

The economy added 228,000 jobs in March, according to the Employment Situation report. This number was well above Street expectations of 131,000. The unemployment rate was flat MOM at 4.2%. Average hourly earnings rose 0.3% MOM and 3.8% YOY, which was again below expectations. Despite all of the sturm and drang in the market about tariffs, this jobs report was pretty decent.

Jerome Powell said that the economy would likely experience higher inflation and slower growth than was anticipated several months ago due to tariffs. “We’re well positioned to address whatever may come. And in the meantime, I’d say we’re waiting for greater clarity before we consider adjustments,” Powell said at a conference for business journalists. 

“Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” Powell said in prepared remarks. “We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.”

“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Powell said. “Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices.”

The impact of the tariffs on inflation will be determined primarily by how our trading partners react. China has already imposed retaliatory tariffs, however a third of our exports to China are commodities, which are falling in response to a trade war. If China isn’t buying US commodities, that increases supply in the US and pushes down prices. We are already seeing weakness in oil, steel and some ag futures. If commodity prices fall, then that will go a long way towards offsetting inflationary trends in final goods.

With the stock market collapsing, the pressure will mount on the Fed to cut rates, even before the May FOMC meeting.

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Please reach out to brent@thedailytearsheet.com