First China, Now Mexico – June 3, 2019

While investors try price in the impact of U.S.-China trade frictions, President Trump unexpectedly announced new tariffs on Mexico. Late Thursday, the president said he will levy a 5% duty on all goods coming from Mexico, potentially rising to 25% by October.

The president said tariffs will be removed if Mexico takes “effective action” to deal with “the illegal migration crisis.” Not surprisingly, the sudden move sent stocks lower on Friday amid anxieties the new barriers will impede U.S. commerce.

The economic uncertainty has been a boon to long-term U.S. Treasuries. Earlier in the year, a shift at the Fed brought yields down. Lately, China (and now Mexico) fears have encouraged additional cash inflows into the safety of government bonds – see Figure 1 (bond prices and bond yields move in opposite directions).

U.S. economic data have been mixed recently. Housing remains under pressure and manufacturing has been soft.

But the broader-based service sector has been more resilient. And, consumer confidence is strong. In May the Consumer Confidence Index jumped up 4.9 points to 134.1 – see Figure 2. It appears most folks aren’t fretting over trade headlines.

The increase doesn’t necessarily mean we’ll see a surge in spending in May. But upbeat sentiment, coupled with job growth, encourages consumer spending, which makes up 70% of GDP (U.S. BEA).

Undoubtably, the recent decline in bond yields has unsettled some investors. However, most economic data aren’t suggesting economic growth is about to stall.

Created 2019-06-03 14:27:02