It is almost universally accepted that tariffs are inflationary and may perhaps cause a recession. It was almost universally accepted that the most aggressive Fed in history that increased the overnight logarithmically from 0.00% to 5.5% would be recessionary.
In fact, all 24 Primary Dealers (money center banks that interact directly with the Federal Reserve/Treasury) and the Federal Reserve itself forecasted a recession because of monetary policy that was enacted.
A recession has/did not occur and economic growth over the past three years have been the greatest since the start of this century.
What will be the impact of the tariffs? Will the currency and debt markets adjust accordingly because of the levies? It is widely accepted that a 4% move in a currency may offset the negative ramifications of a 10% tariff. The Yaun has already adjusted accordingly since the tariffs have been proposed.
This begets the next question, since the debt and currency markets are interlinked, will a crisis occur in one of these markets? Historically a financial crisis originates in one of these two markets which most don’t understand or comprehend. [Note: The Treasury Secretary is a former FOREX (currency).
This begets the next remark. Markets hate uncertainty and tariffs (and a host of other proposed policies) dramatically increase uncertainty, which raises the odds of volatility.
Speaking of the unexpected, the top tier ISM Manufacturing Index rose for the first time since September 2022. Moreover, a gauge that measures new orders rose by the most since May 2022. The ISM Employment sub index is now expansion territory, also for the first time in three years and the price paid component also exceeded expectations.
Perhaps the correct question to ask is why is the data consistently missing expectations, erring on the side of stronger than expected growth that is not permitting inflation to decline to the 2% speed limit? Maybe this is a reversion to the mean and the “New Normal” was only an abnormality.
Commentating about yesterday’s activity, equites retraced a significant amount of their losses following the news that Mexican tariffs would be delayed for thirty days. Treasuries were equally volatile, the yield curve ending moderately flatter.
What will happen today? The JOLTS Jobs data is released at 1000 and GOOG’s earnings after the close.
Last night the foreign markets were mixed. London was down 0.14%, Paris up 0.27% and Frankfurt up 0.04%.. China was closed for a holiday, Japan up 0.72% and Hang Seng up 2.83%.
Futures are flat over tariff concerns. There is also a thirty-day reprieve on Mexican tariffs, but China responded with a 15% surcharge on “select US goods.” Will tariffs morph into a major market narrative, which until yesterday were not necessarily impacting the averages?
The 10-year is off 7/32 to yield 4.59%.
