Market Brief: Market Selloff Accelerates as Tariff “Liberation Day” Comes Into Focus

Global financial markets are caught in a worsening downturn as the White House prepares to unleash its most significant round of trade levies yet. With President Trump expected to unveil broad-ranging reciprocal tariffs against trading partners on Wednesday, North American equity markets are setting up for a third day of losses, safe-haven demand is pushing benchmark ten-year Treasury yields below the 4.2-percent threshold, and the trade-weighted greenback is slipping against its major rivals as investors pursue growth opportunities outside the United States.

Uncertainty is high. After a series of threats, drip-feed announcements, delays, and reversals, markets have no clear understanding of how the so-called “reciprocal” tariffs will be calculated, which countries and sectors might be affected, or when they will be implemented. Administration officials appear equally uninformed—in recent interviews, Scott Bessent, Howard Lutnick, Stephen Miran, and Peter Navarro have provided wildly-contradictory views on why, how, and where duties might be applied—and Kevin Hassett, the president’s chief economic advisor, yesterday told Fox News that he couldn’t provide any guidance, saying Trump has “a heck of a lot of analysis before him, and he's gonna make the right choice I'm sure”.

Early indications are less than promising. Markets seemed to be acting as a corrective influence last week, prompting Trump to say “I think people are going to be very surprised. It'll be, in many cases, less than the tariff that they've been charging us for decades,” but he avoided downplaying the severity of the measures over the weekend, saying he “couldn’t care less” if firms were to raise prices in response, and warning that “all countries” would be in scope on day one. Articles published by the Wall Street Journal and Washington Post yesterday suggested that the president was reverting back to a plan that would entail raising tariffs in a near-universal manner, with additive duties rising as high as 20 percent.

Clarity likely isn’t in the offing. A classic sell-the-rumour / buy-the-fact dynamic dynamic could play out on Wednesday, but a cursory glance at the Trump administration’s track record would suggest that the announced measures will simply represent a starting point for another round of negotiations, revisions, increases, reversals, and exemptions, with the final destination for effective tariff rates likely to remain unclear for many months or years to come.

But the reality of higher tariffs is already here. In the last two months, the United States has implemented 25-percent levies on imports from Canada and Mexico that have not received approval under the US-Mexico-Canada Trade Agreement, 25 percent on all steel and aluminum shipments, and 20 percent on top of existing tariffs on Chinese goods. Unless new exemptions are granted, all non-energy imports from Canada and Mexico will be hit with 25-percent tariffs after Wednesday, goods from the European Union will be taxed at a 25-percent rate, and countries that import oil from Venezuela—like China and India—will see tariffs jump by another 25 percent. The average implemented tariff rate, which has already nearly tripled from last year's levels, could climb above the 15 percent threshold in the coming days, even if reciprocal levies are not added on top.

Hard data is beginning to match survey measures in depicting a dimming economic outlook in the US. According to a release published on Friday morning, the core personal consumption expenditures price index—the Federal Reserve's preferred inflation gauge—accelerated for a fourth consecutive month in February, rising at the fastest pace in a year, while household spending levels slowed dramatically. Separately, the University of Michigan’s headline consumer sentiment index fell 12 percent in March as both Republicans and Democrats reported a sharp deterioration in expectations for the future, dovetailing with similar results from the Conference Board, National Federation for Independent Business, and other surveys. The Atlanta Fed’s gold-import-adjusted nowcasting model suggests that the economy will contract -0.5 percent in the first quarter.

In the days ahead, a series of fundamental data releases could ease or exacerbate fears about the direction of the global economy. With market-implied odds on a rate cut at the European Central Bank’s mid-April meeting sitting close to the 85-percent threshold as traders brace for a tariff-driven economic shock, tomorrow’s inflation numbers for the euro area could remove any nagging doubts. In the United States, the Institute for Supply Management will publish its latest measures of activity in the manufacturing and services sectors, and a raft of labour market reports—including the latest Job Openings and Labor Turnover Survey, private payrolls numbers from ADP, Challenger job losses, weekly jobless claims, and Friday’s non-farm payrolls release—will be carefully parsed for signs that government policy changes are translating into broader economic weakness. And here in Canada, the March jobs report will illustrate the extent to which businesses slowed or halted their hiring activities in the face of the Trump administration’s tariff threats.

Taken in sum, upside risks to global inflation have increased, while downside risks to growth—whether driven by a mathematical decline in the contribution of net exports to gross domestic product, or through a more generalised increase in overall uncertainty levels—are becoming increasingly visible. The stage is set for another round of volatility in currency markets.

*Apologies for the long hiatus: I took an ill-timed vacation and then managed to catch a serious case of Covid on the way back.

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