Trump Tariff Drama Leaves Stocks Uneasy Before Key U.S. Economic Data
By:Ilya Spivak
Wall Street seems to be struggling with what to make of the “here today, gone tomorrow” trade war drama that gripped investors at the start of the trading week. President Trump levied tariffs on China, Canada and Mexico over the weekend. The North American portion of the plan was put on pause within a day of the news.
Stock markets lurched sharply lower at the weekly trading open following the tariffs’ arrival, and the U.S. dollar soared against most of its major peers. These moves began to reverse after Mexican President Claudia Sheinbaum struck a deal with Trump. They have been entirely erased now that Canada’s Prime Minister Justin Trudeau has done the same.
The episode seems to offer a preliminary answer to one of investors’ most pressing questions in the wake of Trump’s election victory in November: Does the new administration see higher tariffs as a goal of economic policy onto itself, or will levies amount to leverage in negotiations? The latter now seems more likely.
Markets may have realized as much, and that would help explain the rise in U.S. Treasury bonds on the day after the whipsaw. Investors have long judged that Trump’s return may fuel inflation, in part because the tariffs he favored would amount to a consumption tax on imports and boost prices. This helped cool Fed rate cut bets and lift yields.
Now that the threat of tariffs appears to be meant as an inducement and may not materialize in earnest, repricing inflation expectations somewhat lower seems to follow. That understandably amounts to a tailwind of bond prices. For their part, stocks might have been expected to embrace the parallel decline in borrowing costs.
That part of the equation is yet to materialize. The bellwether S&P 500 is a case in point. The index just managed to fill in the downward gap at the weekly trading open, but no more. On net, it is trading less than 0.1% removed from last week’s close. A similar setup appears in the Nasdaq 100, the Russell 2000 and the Dow Jones Industrial Average.
Such caution may be rewarded as economic data warns of an ongoing inflationary threat, tariffs or not. A survey from the Institute of Supply Management (ISM) is set to show the U.S. service sector expanded at a solid pace in January. Price growth will be in focus after it quickened to the fastest in almost two years in December.
The companion ISM manufacturing survey revealed a brisk pick up on this front: prices grew at the fastest rate since May. That came alongside an unexpected expansion in overall activity growth as new orders and employment gathered steam. Similar buoyancy on the services side may send Treasury yields and the U.S. dollar higher once again.
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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