Part of the problem is that, in order to get the kind of tariff reciprocity he seeks, Trump needs to be credible in terms of his potential willingness to escalate tariffs to high levels.
It is not shocking that investors have been uncomfortable with this unpredictable dynamic.
Investors do not currently have much if any visibility into the specific announcements and other news flow that will be coming out of the White House on Wednesday, April 2 of next week.
A not so great inflation report
Meanwhile, today’s inflation report did not help sentiment. The core Personal Consumption Expenditures (PCE) Index came in slightly high at 2.8% (versus the 2.7% consensus).
The PCE Index strips out more volatile elements like food and energy and is the inflation metric the Federal Reserve tends to focus on for purposes of decision-making.
Although the market reacted quite badly to the PCE number this morning, based on the idea that the Fed will have less room to cut interest rates going forward, there was not a substantial reaction in the bond market.
Both short-term and long-term bond yields were little changed. The same goes for inflation expectations.
The most reliable indicator of the market’s perception of inflation expectations comes from a metric known as the 5-Year, 5-Year Forward Inflation Expectation Rate.
This is essentially a figure derived from Treasury Inflation-Protected Securities (TIPS) relative to standard Treasury bonds. The 5-Year, 5-Year number specifically represents what the market thinks inflation will be on average for the 5 year period beginning in 5 years.
