Risk markets are reeling today in response to President Trump’s tweet yesterday threatening to increase tariffs to 25% on more than $500 billion of Chinese imports on Friday. Chinese equity markets closed down more than 5%, and European and U.S. markets are down more than 1.5%. The risk-off move has term Treasury yields 5 bps lower on the day.

Trump sent out two tweets yesterday regarding trade negotiations with China. He finished his message saying talks are moving “too slowly as they (China) attempt to renegotiate.”  There is much analysis this morning regarding the president’s motive for these threats. With recent U.S. economic data better than expected (Q1 GDP and April jobs) and stock market performance strong, Trump may have seen an opportunity to push back on criticism that the White House may be relenting on its original demands and accepting a less robust agreement with China.  Some are also speculating that it could have been a response to the recent missile launches in North Korea, which wouldn’t have been allowed without China’s blessing. China’s trade delegation is still expected to travel to Washington on Wednesday for scheduled negotiations, but it’s still not clear whether Vice Premier Liu He will be joining them.  From the market’s perspective, the absence of Liu increases the odds that the tariff increases go through on Friday.

Aside from the focus on China, April CPI will be released on Friday. Fed Chair Powell attempted to downplay the recent softness in core inflation, but it will be an area of attention for the market nonetheless. Several Fed leaders will speak this week, including Powell on Thursday.

Jason Haley
Managing Director, Investment Management Group