Tariff turbulence roils markets as investors seek clarity
Summary
Last week was another roller-coaster week as markets tried to digest announcements surrounding U.S. trade policy. Cooler inflation reports failed to calm markets even though both CPI and PPI came in below expectations. The S&P 500 finished the week up 5.73% after posting a 9.52% single-day return last Wednesday in response to President Trump announcing a pause on reciprocal tariffs. Yields were also extremely volatile, with the 10-year yield closing at 4.49%, up almost 49 bps on the week.
U.S. trade policy
Last week began with continued market pressure due to the previous announcements surrounding U.S. trade policy. However, after President Trump implemented a 90-day pause on all reciprocal tariffs, except for China, the S&P recorded one of its single best days in history. That optimism quickly abated after China retaliated with tariffs on U.S. imports. By the end of the week, after retaliation from both countries, the U.S. had a 145% tariff on Chinese imports, while China had a 125% tariff on U.S. imports. When China announced the increase to 125%, it stated any additional increases from Washington would be ignored, calling the Trump administration's moves a “joke.”
Although the equity markets have been volatile, bond market volatility is more concerning. In fact, the rise in Treasury yields left many wondering if the bond market caused the Trump administration to suddenly change course. The 10-year Treasury moved substantially, trading in a range of 3.86% to 4.53% last week. Many theories exist as to why yields have been so volatile, including the unwind of basis trades, Chinese selling of Treasuries, inflation fears, recession fears, bond vigilantes, and investors losing their appetite for USD-based assets. While it is hard to pinpoint any one reason, the volatility will likely continue until trade negotiations come to fruition and there is clarity on fiscal policy.
Inflation
On a positive note, both the CPI and PPI inflation reports were below expectations. Headline CPI was reported at 2.4%, while Core CPI was 2.8%. Notably, both reports were for March, before any tariff announcements, and many fear these numbers will look much worse in the coming quarters as tariffs work through the system. One item worth watching that may assuage some concerns is the decline in oil prices since the beginning of April. Oil declined by almost 15%, partly in response to OPEC phasing out production cuts more quickly than expected and partly in response to a slowdown in global growth. Regardless, lower oil prices could help offset some potential increases from tariffs.
Other key releases and news
Outside inflation reports, consumer sentiment was another notable release last week and came in well below expectations. The headline reading of 50.8 is the second worst in history. Year-ahead inflation expectations rose to 6.7%, showing that consumers are clearly concerned with U.S. trade policy. Despite substantial volatility in the equity and fixed income markets and plummeting consumer sentiment, jobless claims continue to be well-behaved, with just 223,000 initial claims last week.
The week ahead
Retail sales, homebuilder confidence, and housing starts will be released this week.
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Disclaimers
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