The broad-based S&P 500 Index posted its first weekly advance in five weeks. While some of the gain can be traced to short-term oversold conditions, the trigger came from expectations the Fed may be gearing up to cut interest rates.
First China, now there is the threat of steep tariffs on Mexican imports.
Impact: Stock market volatility and falling Treasury bond yields, as investors seek the safety of Treasuries (bond prices, yields move in opposite directions).
Odds of a recession by year-end remain low but have edged higher amid trade tensions that are slowing global trade flows and dampening business confidence.
The U.S. and China were moving toward a historic trade agreement. It seemed as if the missing pieces of the puzzle were about to fall into place.
Then came a surprise tweet by President Trump on Sunday May 5th. Trump said he would raise tariffs on Chinese imports into the U.S.
While investors try price in the impact of U.S.-China trade frictions, President Trump unexpectedly announced new tariffs on Mexico. Late Thursday, the president said he will levy a 5% duty on all goods coming from Mexico, potentially rising to 25% by October.
The president said tariffs will be removed if Mexico takes “effective action” to deal with “the illegal migration crisis.” Not surprisingly, the sudden move sent stocks lower on Friday amid anxieties the new barriers will impede U.S. commerce.
The economic uncertainty has been a boon to long-term U.S. Treasuries. Earlier in the year, a shift at the Fed brought yields down. Lately, China (and now Mexico) fears have encouraged additional cash inflows into the safety of government bonds – see Figure 1 (bond prices and bond yields move in opposite directions).