- Trump’s retaliatory tariffs send shockwaves through the market.
- China lashes back with 34% tariffs on all U.S. goods.
- Hiring defies expectations in March, and Nonfarm Payrolls beat expectations.
Global markets have been sent into a tailspin following U.S. President Donald Trump’s “Liberation Day” tariff declaration. China has reacted with a retaliatory 34% tariff on all imports from the U.S. starting April 10, matching the level of Trump’s reciprocal tariffs on Chinese products. Volatility has rippled through the market as traders overhaul their expectations for future growth and recession fears intensify. Traders have increased their expectations for Federal Reserve interest-rate cuts this year, and U.S. treasury rates have rallied despite a solid report on American jobs. The yield on two-year notes has traded near its lowest since September 2022, and benchmark 10-year yields have fallen 11 basis points to 3.92%. Markets are fully pricing in a quarter-point rate reduction by June, with a chance of a larger reduction, and traders expect the European Central Bank to lower interest rates more sharply. Agency Commercial Mortgage-Backed Securities (CMBS) spreads have widened significantly week over week on an avalanche of new-issue volume paired with general market uncertainty.
Trump’s announcement exceeded the upper bound of pre-announcement market projections, knocking traders off balance. The new 10% tariff on substantially all imports kicks in legally on Saturday, April 5. For 60 countries, there is a “discounted reciprocal tariff” that ranges from 10% up to 30%, which includes the baseline tariff. The figures were derived by the following: The tariff rate was calculated to be enough to eliminate a trade deficit with each trade counterparty, and then that rate was cut in half; hence, the “discounted” part. This effectively takes the average U.S. tariff rate to over 20%, when it was 3%–4% going into this year. (Most assumptions were for the U.S. tariff rate to hit 10%–11% based on pre-Liberation Day rhetoric.) The White House expects this to generate $500–$600 billion of additional revenue per year. There are product exclusions: steel and aluminum, semiconductors, cars and car parts, and pharmaceuticals. There are existing or planned product-based tariffs on these products, so it doesn’t feel like much of an exemption—just an exemption on the tariffs announced yesterday.
China retaliated against Trump’s tariffs with an onslaught of new measures, including levies on all American goods and export controls on rare metals. China’s measures include a 34% tariff on all imports from the U.S. starting April 10, matching the level of Trump’s reciprocal tariffs on Chinese products. The move comes ahead of the April 9 deadline for U.S. tariffs to take effect and is seen as a shift from China’s previous approach of waiting until duties were in place. The latest U.S. tariffs will raise levies on nearly all Chinese products to at least 54%, potentially crippling Chinese exports to the U.S.
Bond markets have been turbulent following the overhaul in global fiscal policy. Traders have increased their expectations for Fed rate cuts significantly—following the march Federal Open Market Committee (FOMC) meeting, there were two rate cuts priced into the market, in line with the Fed’s dot plot—now, projections have doubled, pricing in at least four rate cuts in 2025. This recalibration in rate-cut expectations has made a drastic impact on the 10-year treasury rate, which dropped 35 bps week over week. The rally in treasury rates has encouraged a significant volume of Agency CMBS to rate-lock: Fannie Mae Delegated Underwriting and Servicing (FNMA DUS) spreads are 7–10 bps wider on the move, while Ginnie Mae spreads are nearly 20 bps wider week over week.
This week’s tariff announcement overshadowed a positive print in the labor market: Nonfarm Payrolls (NFP) increased 228,000 last month in a broad advance, according to the Bureau of Labor Statistics. Downward revisions to the prior two months were modest, and while the unemployment rate rose to 4.2%, it was mostly a rounding error, as it increased from 4.14% last month to 4.15% this month. The stronger-than-expected NFP print cuts both ways, presenting a stronger labor market while also tying the Fed’s hands for the moment. With the expected tariff-induced “transitory” inflation causing inflation expectations to surge for the year, the Fed needs a weaker labor market to act as a green light to cut rates. It would be tougher for the Fed to cut if Personal Consumption Expenditures (PCE) inflation is in the high 3% range, but we have strong NFP prints and low jobless claims, which is what the March print showed us.
If you didn’t tune in to the Fed Chair’s talk at the Society for Advancing Business Editing and Writing annual conference (a real barn burner), you may have missed his analysis of the events of this week. To sum up, he said that while the economic impact of new tariffs is likely to be significantly larger than expected and may lead to higher inflation and slower growth, the Fed doesn’t need to hurry to adjust interest rates and will wait for more clarity on policy impact to react. He further expounded that the current high level of uncertainty should slow, saying, “if you fast-forward a year from now, the uncertainty should be much lower.” Given the uncertainty and volatility we’re seeing in the market right now, we hope his crystal ball is right.
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