In a surprising turn of events, additional US tariffs on China have once again rocked the global market, causing risk sentiment to plummet despite solid US data. Yesterday seemed promising for a turnaround, until President Trump took to social media to confirm the implementation of tariffs on Mexico and Canada starting on March 4th. Adding fuel to the fire, Trump announced an additional 10% tariff on China, doubling the initial 10% rate announced earlier in the year, bringing the total tariff on imports from China to 20%.
The news of escalating tariffs sent shockwaves through the market, shattering any sense of “tariff fatigue” that may have set in. Stocks took a nosedive as headlines of the increased tariffs spread rapidly. However, there is still a glimmer of hope that this could be another case of Trump “crying wolf”, with the possibility of concessions from Canada or Mexico before the tariff deadline next Tuesday.
Despite the tariff turmoil, recent US economic data offered a brief respite from growth concerns. GDP remained steady at 2.3% in the final quarter of last year, while durable goods orders exceeded expectations by rising 3.1% last month. Although initial claims were softer at 242k, likely due to severe weather in New England, market participants largely brushed off this minor setback.
Looking ahead, the medium-term outlook for equities remains positive, but the short-term picture is clouded with uncertainty. It would be wise for investors to tread lightly as they head into the weekend, especially with a flurry of key economic indicators set to be released next week. The outcome of events such as the tariff deadline, ISM manufacturing and services PMI prints, and the February US labor market report will play a crucial role in shaping market sentiment.
In the bond market, Treasuries saw a slight dip across the curve, hinting at profit-taking as the month drew to a close. Despite recent fluctuations, the risk/reward balance still favors long positions across the Treasury curve, particularly at the front end. The foreign exchange market also showed signs of life, as tariff-related headlines bolstered the US dollar and pushed the DXY above the 107 mark. Amidst lingering tariff risks, the dollar’s upward trajectory seems poised to continue.
As we approach the end of February, a relatively quiet economic calendar lies ahead. Of today’s releases, the US PCE figures are expected to draw the most attention, with the core PCE deflator projected to have risen 2.6% year-over-year in January. This moderate increase is unlikely to significantly impact the policy outlook. Other notable releases include German inflation data, eurozone-wide CPI data, Q4 Canadian GDP figures, and February’s MNI Chicago PMI report.
In summary, the impact of tariffs on global markets remains a pressing concern, with investors closely monitoring key economic indicators for signs of potential growth slowdown. As uncertainty looms, the market’s response to upcoming events will be critical in determining the future trajectory of equities, bonds, and currencies.
