Markets have been captivated by the ping-pong exchange of tariff threats between China and the US. On Friday, the S&P lurched 2.2% lower after President Trump said he had asked officials to prepare tariffs on an additional USD 100bn of Chinese imports – itself a response to talk of higher import taxes from China.
We are carefully monitoring developments for signs that a verbal conflict could turn into an economically damaging trade dispute. But the chances of a deal remain strong, with White House economic advisor Kudlow saying, "We're not going to end up in a trade war." Investors can also take comfort from the fact that another risk, that of accelerating US inflation, has continued to subside.
- Wage pressures remain subdued. The Atlanta Fed wage tracker has dropped to 2.9% year-on-year from 3.9% in November. The closely watched average hourly earnings data rose 2.7% year-on-year in March, according to Friday's payroll data. That’s well below the 2.9% initial reading for January, which helped trigger a 10% decline in the S&P 500 in February.
- Inflation expectations have also been stable, close to the Fed’s inflation target. The 10-year US breakeven rate is down from 2.14% on 5 March, to 2.08 at present.
- Fed officials have been at pains to reassure markets that even slightly above-target inflation would not likely provoke faster tightening. Atlanta Fed president Raphael Bostic said inflation at 2.2–2.3% would not represent overheating. CPI data is out on Wednesday.
So, with inflation still looking tame, we are overweight 10-year Treasuries versus cash. We also don't expect an inflation spurt that would undermine stocks.