Rates Love Tariffs

Tariff Announcement: Global 10% Tariff Shocks Markets

All other economic reports were completely ignored after President Trump’s historic tariff announcement on Thursday. In addition to the existing tariffs on Canada and Mexico related to illegal immigration and drug smuggling, and the existing 25% tariff on auto imports, the administration is now implementing a blanket 10% tariff on all other countries. Some countries will see higher amounts based on their current tariffs and other trade policies that negatively affect the U.S.

Market Reaction: Stock Drop Drives Rates Lower

This tariff news drove stock prices much lower. In what is known as a “Risk-Off Trade”, investors sold volatile stocks and moved their money into safer bonds like U.S. Treasuries and Mortgage-Backed Securities (MBS). This trade pushed rates lower in one of the quickest single-day drops in the post-COVID economy. In January, U.S. 10-year Treasury yields hit 4.80%. This week saw intraday lows of 3.89%, almost a 100bps drop.

While mortgage rates don’t change in lockstep with the 10-year Treasury, they do follow closely. Mortgage rates behave a bit like gas prices when there is a sudden change – quick to go up, but slower to come down. It may be a couple of days before the full benefits to rates are realized by mortgage lenders.

Economic Impact: Tariffs Could Have Mixed Effects

What can tariffs do to our economy? A major market test of tariffs hasn’t been seen since the late 1800s. During the first Trump administration, we saw a smaller version of what was just implemented. In that period, tariffs caused a contraction in consumption, which led to lower rates.

The administration hopes the tariffs will revitalize the manufacturing sector by “re-shoring” industry – bringing manufacturing and business back to the U.S. Another potential positive would be lower Treasury rates, which allow the Treasury Department to refinance national debt at lower rates. Grocery prices could also decline as farmers are forced to sell domestically, increasing the supply of goods.

On the downside, concerns over tariffs increasing other prices may have contributed to the stock market drop. One analyst even mentioned the possibility (however unlikely) of a $3,500 iPhone. There are also valid concerns that tariffs could push us into a recession. Even if industries begin re-shoring, building a $1 billion factory doesn’t happen overnight. It remains to be seen how much of this tariff policy is a negotiating tactic versus a real trade policy. Time will tell.

JOLTS Report: Job Openings Fall Slightly

As mentioned, economic data this week was largely ignored post-announcement. That said, we still received several key reports. The JOLTS (Job Openings and Labor Turnover Survey) for February came in lower, dropping from 7.76M to 7.57M. The quits rate, which shows how many people voluntarily leave jobs for better opportunities, remained at a very low 2%.

ISM Manufacturing: Sector Enters Contraction

The ISM Manufacturing Index continued its downward trend, coming in at 49, down from the previous 50.3. A reading below 50 indicates contraction in the manufacturing sector.

Atlanta Fed GDP: Estimate Revised Sharply Lower

The Atlanta Fed continued to revise its Q1 GDP estimate lower, dropping it from -2.8% to -3.7%. This is a significant negative adjustment and aligns with broader signs of slowing economic activity.

ADP Employment Report: Job Growth Beats Expectations

There was some good news on the employment front. The ADP Employment Report for March showed 155,000 jobs were created, which beat expectations.

BLS Jobs Report: Headline Strong, Revisions Disappoint

The BLS (Bureau of Labor Statistics) Jobs Report for March also showed strong numbers, with 228,000 jobs created, surpassing expectations. However, January and February were both revised down by about 30,000 jobs each. This follows a pattern of BLS beating expectations in the initial report, only to revise them lower later.

Average Weekly Earnings came in at 3.2% year-over-year, down from 3.7% in February. The unemployment rate ticked up from 4.1% to 4.2%, though this was due to a very slight numerical changethat caused rounding.

Fed Outlook: Markets Now Expect 5 Rate Cuts

Markets are now pricing in 5 Federal Reserve rate cuts this year, up from about 2 earlier in the year. While next week brings fresh inflation data, it remains to be seen whether markets will even pay attention amid all the trade drama.

Upcoming Data to Watch:

• Tuesday: 10-Year Treasury Auction, Federal Reserve Meeting Minutes
• Thursday: Initial and Continuing Jobless Claims, Consumer Price Index (CPI), 30-Year Treasury Auction
• Friday: Producer Price Index (PPI)