Well, he did it. President Trump on Saturday imposed 25% tariffs on Canada and Mexico (except for oil, which got a lower rate), and 10% tariffs on China. The market, as we wrote on Friday, was bracing for but not really expecting this to happen. Now that it's a reality--at least for now--we're seeing a fairly sizeable reaction.
Or at least we were! Mexico's president, Claudia Sheinbaum, just single-handedly turned today's sizeable selloff into something much more puny. In a post on X last hour, she said she had a good discussion with President Trump and reached a "series of agreements." Namely, she said that Mexico will immediately send 10,000 members of its national guard to the northern border to prevent drug trafficking, especially fentanyl, and in return the U.S. will pause tariffs on Mexico for a month.
And the markets immediately U-turned. The Dow, which had been down more than 600 points at the lows, is now down barely 100 points. Nvidia had been down 5%--now its decline is half that amount. Names like Nike, Apple, auto parts supplier Aptiv, and fertilizer maker Mosaic were also among the hardest hit, which is worth bearing in mind if tariffs are resurrected.
But let's not forget that the 10% tariff on China is still supposed to go into effect tomorrow. Which is why Nike and Apple are only slightly off their lows, with their big supply chain exposures. Canada too. Tesla had been down 7% and is still one of the biggest decliners in the S&P 500. Canada's former finance minister, Chrystia Freeland suggested over the weekend that 100% retaliatory tariffs on Tesla should be a countermeasure.
Going up is the U.S. dollar. It popped over 109 this morning--moving closer to a thirty-year high. While that will help absorb the impact of tariffs for the consumer, it also broadens the headache for corporate America, and U.S. exporters of both goods and services. This as we just learned that manufacturing is back into expansion for the first time in almost three years! Which may also help explain the market's comeback this morning.
Plus, there are other tailwinds that, depending on who you talk to, could prove even more helpful to the economy this year. "I continue to maintain that the most important policy driver under Trump 2.0 will come from deregulation and a smaller federal government footprint," wrote David Zervos of Jefferies in a client note this morning, advising readers to stay long stocks.
Zervos did warn, however, to be wary of how the Federal Reserve reacts to tariffs. If they believe that they will be inflationary, even just in the near-term, they are less likely to press ahead with rate cuts. That could put pressure on the market until or unless it becomes clear that Trump's other policies will ultimately be disinflationary.
Money Report
Robert Lighthizer, Trump's trade chief during his first term, was interviewed on 60 Minutes last night. He was asked about data showing that tariffs on steel during Trump's first term did create over 1,000 jobs in the steel industry--but cost 75,000 jobs elsewhere from higher costs. Was he sure that bigger tariffs wouldn't result in more job losses this time around?
"We tried it the other way, Scott," he replied. "If we do this, and in ten years it doesn't work, then we can always go back and fail again the way we have in the past." In other words, we are about to find out--if tariffs actually stay in place that long.
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See you at 1 p.m!
Kelly
