Lower rates spark surge in hedging activity as tariffs hit

Tariffs

The Trump administration announced its much-anticipated tariffs, sending markets lower and recession odds higher. The tariffs were more severe than many forecasted with a 10% baseline tariff and much higher rates for some nations, including key trading partners. China will face 34% tariffs, Japan 24%, and the EU 20%. There has been conflicting information as to whether the administration is open to negotiations, with many cabinet members stating negotiations were not on the table. However, President Trump said he was open to negotiations if he received a “phenomenal” offer. Retaliatory responses have been somewhat muted so far, with only China responding with a 34% tariff on U.S. imports.

With the spike in volatility and markets rapidly declining, traders immediately began to price in additional Fed cuts with fed futures implying five rate cuts, beginning as soon as May. This was likely an overreaction, and markets began to temper expectations by the end of the week. At a scheduled appearance on Friday, Chair Powell gave no indication of earlier rate cuts, stating that the Fed is “well positioned to wait for greater clarity.” At the time of this writing, the market is still pricing in four rate cuts this year with a 40% probability of a May cut. This is starkly different than just one week ago and a reminder that it’s prudent to manage risks in the current environment of uncertainty.

In response to recent volatility, Chatham saw clients take advantage of lower rates by locking in a portion of their base-rate risk in anticipation of going to market later this year. Investment grade clients were especially active in hedging upcoming bond issuances.

Jobs

There were a number of employment reports over the week that point to a still solid, but potentially cooling labor market. The Job Openings and Labor Turnover Survey (JOLTS) was a bit lighter than expected at 7.568M, with the quits rate holding steady at 2.0%. Jobless claims continue to be very well behaved, with initial claims at 219,000, well below the levels that would worry the markets.

Finally, the total nonfarm payroll employment rose by 228,000, much higher than expectations of 140,000, although January and February employment was revised down by a combined 48,000 jobs. Average hourly earnings came in as expected at 0.3% month-over-month and was slightly lower than expected on a year-over-year basis at 3.8%, supporting the Fed’s belief that wage growth will not be a driver of inflation moving forward. Overall, the employment picture remains solid, but investors will be watching closely to see if the uncertainty over the past few months finds its way into the labor market.

Other key releases and news

There were several other notable economic releases last week. The ISM manufacturing index was slightly below expectations at 49, still in contraction territory. The ISM Services index was also released with a reading of 50.8, well below expectations. Construction spending and factory orders both slightly beat expectations. The picture remains mixed with many indicators pointing to a slowing, yet resilient economy. However, it is worth mentioning that most of these reports are backward looking, and we don’t yet know what the impact of the tariff announcements will be throughout the global economy.

The week ahead

CPI, PPI, consumer sentiment, and the continued news surrounding tariffs will be the focus of investors this week.