31/ May’19

Stocks and bond yields tumble after Trump hits Mexico with tariffs

US to place new tariff on Mexico over illegal immigration

Rep. Mark Green (R-Tenn.) reacts to President Trump’s tweet that the U.S. will impose a 5 percent tariff on imports from Mexico.

Stocks opened sharply lower Friday with investors fearing that President Donald Trump's surprise decision late Thursday to impose tariffs on all Mexican imports, combined with the trade war with China, risks slowing economic growth.

The U.S. will impose a 5 percent tariff on incoming Mexican products until the country limits illegal immigration on the U.S. southern border, Trump announced in a tweet Thursday night. The tariff will go into effect on June 10, Trump said in a tweet late Thursday, while threatening to raise it further “until the Illegal Immigration problem” is resolved.  On July 1 the tariff could rise to 10 percent; on Aug. 1 it could rise to 15 percent; and on Oct. 1 it could climb to 25 percent.

The benchmark U.S. S&P 500 index now looks likely to end down for the month for the first time since December and May could be the third worst month for U.S. stocks since the US credit rating downgrade in August 2011.

“If this is implemented it will be a serious downside risk to the U.S. economy,” Torsten Slok, economist at Deutsche Bank said. “Looking carefully at the trade data between the U.S. and Mexico shows that 67 percent of all imports from Mexico are related-party trade which is another way of saying intra-company trade. What this means is that U.S. companies are using Mexico for production. Put differently, most of the trade between Mexico and the U.S. is the global supply chain. And the trade data further shows that the biggest import categories from Mexico to the U.S. are cars and car parts and trucks and buses.”

Meanwhile, China is planning to restrict exports of rare earth minerals to the U.S. and may target specific American companies according to overnight media reports.  The trade war is already affecting Chinese economic growth with the official manufacturing purchasing managers index falling into a contraction below the 50 index level. The official NBS manufacturing PMI fell to 49.4 in May, from 50.1 in April.

Shares of trade-dependent corporations, such as carmakers and semiconductor manufacturers, fell sharply. Automakers  GM and Ford tumbled. Both companies have significant production in Mexico that could be subject to tariffs. Shares of railroads Kansas City Southern and Union Pacific also fell.

The yield on the 10-year U.S. Treasury fell to 2.15 percent, a new 20 low.

The market is currently pricing-in three Federal Reserve interest rate cuts by the end of next year, with Vice Chairman Richard Clarida on Thursday suggesting the central bank would be open to reducing rates if economic growth slows and inflation falls.

But the inflation measure closely watched by the Fed – personal consumption expenditures price index – rose in April for the first time this year in data published early Friday. The PCE index was up 0.2 percent for the month and 1.6 percent annually, the Commerce Department said.

The Stoxx Europe 600 Index fell 1.4 percent Friday led by autos and basic resources with European shares set for largest monthly drop since January 2016.

China’s Shanghai Composite closed down 0.24 percent, the Hang Seng was off 0.79 percent and Japan’s Nikkei 225 ended lower 1.63 percent.

Crude oil prices were down sharply: West Texas Intermediate, the U.S. benchmark, tumbled 2.33 percent to $55.27 per barrel. Brent crude oil, the European benchmark, dropped 2.3 percent to $63.82 a barrel. Crude oil prices are down about 11 percent in May, the biggest monthly fall since last November.