TARIFFS
The Trump administration increased tariffs on imports from China, and the Chinese government retaliated until tariff rates hit 145% on goods entering the U.S. from China and 125% on U.S. exports to China. The administration also announced a 90 day pause on the reciprocal tariffs announced on April 2nd for all nations except for China in order to allow those nations the chance to negotiate trade deals. Risk assets rallied exuberantly on news of the pause but gave back some of these gains as the U.S.-China dispute looked like it is even further from resolution than before.
Our Take: Market movements in both directions are indicating concerns about the Trump administration’s trade policy and its impact on the U.S. economy and inflation. Survey data indicate increased concerns as well. Even if the 90 day pause and concurrent negotiations result in much lower reciprocal tariffs than those announced on April 2nd, there will still be higher tariffs for most of the world and likely an almost complete halt in trade between the U.S. and China. These changes are likely to cause economic disruptions and create inflationary pressure, at least in the short term. If consumers and businesses do begin to reduce or delay investments, hiring and purchases in response, that could tip the U.S. into recession.
INFLATION
The Consumer Price Index (CPI) fell 0.1% in March, below expectations for a 0.1% increase. The core CPI, excluding food and energy, rose 0.1% versus expectations for a 0.3% rise. Year-over-year, consumer prices are up 2.4% while core CPI has risen 2.8%. Producer prices (PPI) also came in lower than expected, falling 0.4% in March while rising 2.7% over the last twelve months.
Our Take: It is encouraging to see inflation lower than expected but the world economic picture has changed dramatically in the last week. The March report may not be representative of inflation’s future direction as the new tariff regime is implemented. There was a very muted market response to the CPI release as focus was clearly elsewhere.
MUNICIPALS
President Trump announced this week on social media that his administration plans to withhold federal funding to sanctuary cities. If this occurs, cities including New York, Chicago, Denver and Boston could face budget shortfalls due to the lack of federal funding.
Our Take: Political risk is a real risk when investing in municipal bonds. Affected cities could struggle to pay for essential services if federal dollars disappear. Should Trump’s sanctuary city funding plan proceed, it will likely be challenged in court. During Trump’s first administration, a similar mandate was announced but was subsequently blocked by federal judges.