Trump slaps fresh tariffs, rattles markets ahead of PCE inflation

Tariff headlines add to caution ahead of PCE data

Markets steadied on Friday as European trading got underway following a wobble overnight in the US and in Asia earlier in the session. With much of the focus this week being on today’s PCE inflation report for fresh guidance on the Fed’s policy outlook, investors were sidetracked on Thursday by unexpectedly strong readings on the US economy as well as by President Trump’s long-awaited announcement of pharmaceutical tariffs.

A string of upbeat economic indicators has cast doubt on the need for aggressive easing by the Fed, backing the cautious stance of the majority of FOMC officials. Final GDP estimates for Q2 showed that the US economy grew by a stronger-than-expected 3.8%, driven by a strong rebound in consumption. Durable goods orders for August also came in above expectations, but most importantly, jobless claims continued to fall back from the recent jump in the week ending September 20, allaying concerns about a weakening labour market.

The data dented expectations for Fed rate cuts for the remainder of the year, with two 25-bps cuts looking questionable. Further dashing hopes for rapid rate cuts was the unveiling of new import tariffs by the US president.

Trump announced 100% tariffs on patented drugs and surprised by adding other products to the list. Imports of heavy-duty trucks will be charged 25% tariffs, kitchen cabinets and bathroom vanities face a 50% levy, while upholstered furniture from abroad will cost 30% more.

Dollar stands tall as rate cut bets pared

However, whilst all the headlines made for some very choppy trading in the ensuing hours, FX markets saw the biggest moves, with other markets reacting in a slightly muted fashion.

US Treasury yields edged higher after the solid US data releases, pushing the US dollar to more than three-week highs against a basket of currencies. The euro tumbled below $1.17 and sterling fell to seven-week lows below $1.34.

Futures markets are pricing in just under 40 basis points of rate cuts at the Fed’s remaining two meetings of the year compared to around 50 bps immediately after the September FOMC meeting. Although the slew of Fed speakers this week has highlighted the growing divisions at the central bank about the state of the labour market, the data firmly support the views of the more hawkish members, and this is very dollar positive at the moment.

But the week isn’t over yet and today’s PCE inflation and personal consumption data will be watched closely for more direction. The all-important core PCE price index likely stayed unchanged at 2.9% in August. The risks to the dollar from either an upside or downside surprise are symmetrical at this point.

US stocks suffer a rare setback

On Wall Street, all three main indices closer lower for the third straight day. Both the S&P 500 and Nasdaq are on track to lose about 1% for the week, which seems reasonable given the three consecutive weeks of gains towards record highs.

The pricing out of one or two additional rate cuts isn’t a huge blow to equities as long as the reason for it is a stronger economy. However, the negative reaction could worsen if today’s PCE price indices are hotter-than-expected.

The latest tariff decisions are also not seen as hugely negative, as they’re more likely to hurt companies outside of the US. Moreover, the sectoral levy on pharmaceuticals was narrower than feared, as it only targets branded or patented drugs and excludes producers who are planning to build a factory in the US.

With September drawing to a close, the biggest risk to risk assets could come from a more unexpected source – a government shutdown. Trump cancelled a planned meeting with Democratic leaders on Thursday to discuss a bi-partisan deal on a government funding bill, with the two sides far apart with just days to go until the September 30 deadline.

Gold bulls lose momentum, oil rallies

In commodities, gold is slowly crawling higher today, helped by the somewhat softer dollar. But unless the greenback takes a hit by a weak PCE report later today, gold could struggle to regain significant upside momentum.

Oil futures, on the other hand, have had a strong week, as President Trump continues to pile pressure on European countries, including Turkey, to stop buying Russian oil.

However, the direct impact of this is limited as it shows the White House isn’t ready to impose any new US tariffs on Russian exports just yet and what’s really lifting oil prices is the damage done to Russia’s oil refining facilities by Ukrainian attacks.

WTI futures were last trading around $66.16, up almost 4% for the week.