Tariff War or Not, Stocks Face Mounting Recession Risk: ISM Preview

Trade war headlines distract from the real reason that the markets fear incoming recession.

• Stock markets jolted as the Trump administration hits out with new tariffs.
• New duties may not hurt U.S. growth too much, but it remains in trouble.
• Global recession risks may spook markets anew on soggy U.S. ISM report.

Stock markets fell out of bed as the Trump administration moved ahead with new tariffs targeting Canada and Mexico. The two countries along with the U.S. are part of the United States-Mexico-Canada Agreement (USMCA), a regional free trade deal that President Trump negotiated and signed in his first term in office.

The new levies were due to take effect in February, but Mexico’s President Claudia Sheinbaum and Canada’s Prime Minister Justin Trudeau convinced Trump to delay them for further negotiation. Now, the U.S. has triggered broad 25% duties on all imports from its largest trading partners. China was hit with further 10% tariff too.

The bellwether S&P 500 stock index fell as much as 2.2% intraday. The Nasdaq 100 and the Russell 2000 indices dropped as much 2.6% and 3%, respectively.

Equities stormed higher from these lows toward the end of the trading day, however. Tech names led the rebound, moving to add close to 1% on the day. Every other sector is trading flat or down.

Stocks seesaw as new U.S. tariffs hit Canada, Mexico and China

The bounce might speak to hopes for a relatively short-lived clash that sets the stage for successful renegotiation of the USMCA – up for renewal in 2026 – while leaving the U.S. economy relatively unscathed at the margin. The world’s largest economy has vastly outperformed global peers since last year thanks to a buoyant service sector.

U.S. services demand is mainly served by domestic firms, while imports mainly fall on the “goods” side of the ledger. Lopsided inflation data has shown that demand there is already anemic. This helps explain why U.S. economic strength has not spilled over to other markets in recent months.

Perhaps the markets thus concluded that the tariffs would do little to disrupt the tech-centric, services-driven U.S. growth in the near term even as they motivate their goods-exporting target countries to quickly placate the Trump administration. Such rose-tinted optimism may prove to be short-lived, however.

Global recession worries may return on U.S. ISM data

The markets have been gripped by swelling global recession fears since shocking S&P Global purchasing managers index (PMI) data showed service sector activity growth shrank for the first time in 25 months in February. New orders growth fizzled, and business sentiment soured, reflecting “uncertainty [about] government policies.”

This is a stark reminder that the growth scare now preoccupying markets is rooted in service sector sentiment. New tariffs might not make the situation worse here meaningfully worse in that their direct impact is aimed at the goods sector, but that does not mean it is necessarily going to improve either.

With that in mind, the spotlight turns to the service sector purchasing managers’ index (PMI) survey from the Institute of Supply Management (ISM). Analytics from Citigroup suggest U.S. data outcomes now tend toward disappointment relative to forecasts.

If the ISM result thus echoes the soggy S&P Global version, stock markets may swoon anew as recession fears return. In turn, that might send Treasury yields and the U.S. dollar lower amid a dovish rethink of Federal Reserve rate cut expectations.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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