Good morning. In a time of so much market uncertainty, every big data release feels that much bigger. But today’s US CPI numbers may be the real thing. Investors are wrestling with what looks like slowing growth, and consumer and business surveys show that Americans are fretting over higher prices. If CPI comes in hot today, the market may buy into the worst-case scenario: stagflation. Stay tuned for what could be another day of market mayhem. And email me: aiden.reiter@ft.com.
The pain continues
If the market had any hope for a “Trump put,” the president may have extinguished it yesterday. Things looked relatively calm on Tuesday morning after Monday’s market rout: futures markets foreshadowed a pick-up, and the chaos did not extend to other countries. The market opened on an upswing.
The calm did not last. Around noon, Donald Trump said the US would double the 25 per cent tariffs on steel and aluminium for metals coming from Canada, and the market promptly resumed its slide. A couple of hours later, Ukraine said it would agree to a US-brokered ceasefire — inspiring some confidence in the president’s tactics. Equities ticked up again.
After all the ups and downs, there was a final sell-off towards the end of trading, and the S&P 500 finished the day down 0.8 per cent.
Yesterday’s rollercoaster only adds to what many analysts told us was the key cause for Monday’s sell-off: tariff uncertainty. Here is Mike Reynolds, vice-president of investment strategy at Glenmede:
From our perspective, the movements in the market reflect uncertainty around tariffs — not just the details of what has already been proposed, but also the fact that markets are conditioning themselves to a reality where new tariffs can pop up at any time. It now seems like there is a new tariff every week.
Tariff uncertainty is not the same thing as economic weakness — the economic data has been fine and, as Ed Al-Hussainy at Columbia Threadneedle noted, there could still be a pick-up in growth later this year as fiscal stimulus and tariff policies crystallise. Investors and businesses dislike policy uncertainty in and of itself. For businesses, it makes it hard to hire, invest and operate. For investors, after years of great returns and high valuations, it inspires a run for the exit, to protect their gains.
Yet to some market participants, the path we are heading down on tariffs and Monday’s fall point to more than just market uncertainty — they signal fears of an economic slowdown. From a recent note by Jan Hatzius, chief economist at Goldman Sachs, which downgraded its US growth forecast on Monday:
The reason for [our GDP] downgrade is that our trade policy assumptions have become considerably more adverse and the administration is managing expectations towards tariff-induced near-term economic weakness . . . While President Trump ended up softening the 25 per cent tariff on Canada and Mexico soon after implementation, we expect the next few months to bring a critical goods tariff, a global auto tariff, and a ‘reciprocal’ tariff.
The S&P 500 has now shed all of its gains from the run-up to the election and more. Have we just seen a correction, or potentially a slight overcorrection, due to tariff uncertainty? The unwinding of an overcrowded American exceptionalism trade? Or the start of a true economic slowdown — or, perhaps, stagflation — and with it a longer bear run?
The slowdown theory is looking like a better bet. Economically sensitive small caps have had major losses. Equity markets in Europe and Asia fell yesterday, too, in a global flight to safety — but none fell nearly as hard as the US did on Monday. And US investors did not rush in to buy the dip at the end of the day on Tuesday.
Also, on Monday, spreads between investor-grade corporate bonds, high-yield bonds and Treasuries jumped, after ticking up for a few weeks. According to Robert Tipp, head of global bonds at PGIM, rising spreads are partly a reflection of concerns about the economy, as the president’s recent remarks make it seem that he might not be “unidirectionally focused on improving the economy and protecting US businesses”.
Yesterday’s equity movements, however, did not neatly fit into that theme, suggesting that the market is still not wholly convinced a slowdown is coming. While the whole market fell, defensives fell the most. And Monday’s biggest losers — infotech and consumer discretionary — fell the least. This makes it seem like investors are correcting for Monday’s wild sell-off, just a bit:
It’s possible, then, that this is not the start of a bear market, and is just a case of investors adjusting portfolios to an uncertain world. Moves in the Treasury market were mostly muted; we saw a tiny uptick in yields yesterday, after a tiny downtick the day before. That suggests that investors left Treasuries, rather than dashing to them for safety, on Tuesday. But, according to Brij Khurana at Wellington Management, we may not want to read too much into Treasury moves at the moment:
The bond market is somewhat on the sidelines ahead of [Wednesday’s] CPI, which I would consider one of the most important in years considering the equity weakness. If we get a high core print, the market is going to have to contend with a Fed that will not ease aggressively into a slowing economic cycle. That is reminiscent of the [bad] 2018 market experience.
We won’t get more clarity on whether this is a correction, a slowdown, or worse until we get more economic data. But we are certainly set for an interesting few weeks. Now that it seems that there is no Trump put, we may get even more tariff shocks and surprises. And markets are certainly bracing for it; Vix futures suggest “high volatility for a while”, says Russell Rhoads at Indiana University.
As we wait for more data, it’s best to lead with logic, rather than emotion. There are still a lot of unanswered questions on tariffs and the US economy’s strength. Panic should not rule the day. But, with stagflation on the table, it just might.
Correction from yesterday’s letter
In yesterday’s note, we mistakenly wrote that 10-year Treasury prices rose by 10 basis points. It should have said Treasury yields fell by 10 basis points. Our apologies.
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