Market Brief: Bloodshed Continues As Markets Price US Downturn  

A global market selloff triggered by Donald Trump’s effort to upend the global trading system is still underway this morning, with equity futures pointing to further losses after trillions of dollars in value was erased during yesterday’s session. Most major US and international indices are down more than 5 percent from Tuesday’s levels, benchmark ten-year Treasuries are yielding less than 3.9 percent for the first time since early October, and measures of implied volatility—expectations for more turbulence in the future—are holding near levels last hit during August’s unwind in the yen carry trade and the collapse of Silicon Valley Bank in early 2023.

The dollar is showing signs of steadying after a bruising reversal that saw it lose all of its post-election gains, but there’s no hard evidence to suggest that this is a function of an abrupt decline in confidence in US government debt instruments, or in the dollar’s role itself. Credit default swaps on US sovereign debt have moved up only incrementally and the “term premium”—the additional return investors demand for holding long-term Treasuries compared to shorter-term instruments—remains relatively tame.

Instead, a ratcheting down in growth expectations seems to be at fault. Private sector growth forecasts have plunged since the onset of Trump’s trade war, with economists expecting supply chain disruptions, rising import costs, weaker export growth and persistent uncertainty to begin depressing activity in the coming months.

Federal-fund futures now show the Federal Reserve cutting rates by more than 120 basis points over the next year: the fastest pace of easing expected among major developed-market central banks. This is putting downward pressure on cross-currency rate differentials and sapping the dollar’s strength.

Today’s labour market data show the US job creation engine remaining strong, but still losing momentum. According to numbers just released by the Bureau of Labor Statistics, 228,000 new roles were created in the month of March, overshooting estimates for a gain closer to the 140,000 area, but the prior month’s gain was revised down to 117,000, driving a sharp decline in the three-month average rate of job creation. The unemployment rate edged up to 4.2 percent and average hourly earnings climbed 3.8 percent in year-over-year terms, down from 4.0 previously. We think job markets will soften further in the months ahead, and suspect that Federal Reserve chair Jerome Powell will acknowledge a worsening outlook for employment, growth, and inflation when he speaks in Arlington, Virginia later this morning, even as he remains committed to taking a wait-and-see approach to policymaking.

Here in Canada, the loonie is up sharply from Wednesday’s closing levels, but is running out of momentum as traders contemplate the deepening headwinds facing the economy. Although the country escaped getting hit during Trump’s latest round of tariffs, levies are now in place on several of the country’s most important export categories, work stoppages are underway at auto plants, commodity prices are still under pressure, and a broad swath of industries remains vulnerable to a downturn in US demand. Data released this morning showed 33,000 jobs were lost last month and the unemployment rate climbed to 6.7 percent, aligning with other numbers published over the last month in suggesting that a relatively-positive early-year growth handoff is running out of steam. The exchange rate is underperforming its G10 counterparts as consumer confidence continues its long erosion, and we expect further gains against the greenback to be hard-fought.

The Mexican peso is trading near its strongest levels since November after the country emerged largely unscathed from Wednesday’s reciprocal tariff announcement. Goods that are compliant with the USMCA trade agreement will continue to receive preferential treatment under the new regime, while non-compliant products will be tariffed at a rate of 12 percent, and levies will remain in place on steel and aluminum products, along with vehicles and auto parts.

In theory, Mexico has an opportunity to gain manufacturing market share as companies re-route supply chains away from countries in Europe and Asia where US tariff rates have been set much higher. “We have preferential treatment now. It has to do with the relationship of respect that we have constructed with President Trump,” president Claudia Sheinbaum said at her daily press conference Thursday, noting that she was trying to convince leadership teams at global automakers like BMW, Mercedes-Benz, and Volkswagen to escape US trade protectionism by moving their production to Mexico.

We’re skeptical. Although dozens of businesses have announced ambitious plans in recent years, the vast majority of foreign direct investment in Mexico has come through the reinvestment of revenues from existing enterprises. New investment dropped sharply in 2024, falling by 34 percent in year-over-year terms to its lowest levels since the mid-nineties as domestic political turbulence, poor infrastructure, and trade threats from the United States intersected to dampen international appetite for large projects. Looking ahead, it seems unlikely that these concerns will be fully alleviated—or that foreign automakers will make multi-decade investment shifts—given the Trump administration’s propensity for changing direction on trade policy. The peso could struggle to make further headway.

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