Trade War Escalates as EU and China Retaliate: April 9, 2025

Shortly after Trump tariffs went into effect at midnight, China and the EU responded with levies of their own. Beijing retaliated by with an 84% duty on US imports while Brussels delivered 25%. The historic trade jabs have driven significant moves in financial markets, with the most noteworthy occurring in long-end rates and crude oil. We’re seeing a dramatic bear-steepening across the yield curve, triggered by a jump in inflation expectations, as the 10-year Treasury maturity leaped from a low of 3.86% on Friday to a high of 4.51% today, marking a substantial 65-bp move in just three and a half business days. But while folks think that global commerce disagreements will increase costs, the deflationary developments from China, the top energy importer, are quite serious, as crude oil dove to a 51-month low this morning. Stocks, however, appear tired of selling off, and equity buyers are stepping up to the plate, defending the S&P 500’s pivotal 5,000 level amidst elevated volatility and increasingly attractive valuations.

Equity Bulls Buy the Dip

Equities are indeed seeing some interest today and investors are buying the dip. But small-cap stocks aren’t catching any bids. They are getting punished due to the double whammy of being cyclically oriented and rate sensitive simultaneously. Meanwhile, the Russell 2000 is the only major domestic benchmark in the red, as the Nasdaq 100, S&P 500 and Dow Jones Industrial gauges advance by 1.2%, 0.6% and 0.4% while the former loses 0.7%. Sectoral breadth is split, however, as technology, materials and consumer discretionary drive the leaders; they’re up 1.5%, 0.5% and 0.3%. Conversely, utilities, healthcare and real estate are shedding 2%, 1.7% and 1.1%. Rates are moving north in bear-steepening fashion, with the 2- and 10-year Treasury maturities changing hands at 3.74% and 4.41%, 1 and 12 basis points (bps) heavier on the session. But loftier borrowing costs aren’t helping the greenback, as its index plunges 74 bps. The US currency is depreciating relative to the euro, pound sterling, franc, yen, loonie and its Aussie counterpart, although it is appreciating versus the yuan. Commodities ex-oil are bullish with gold, copper, silver and lumber climbing 3.5%, 2.7%, 2% and 0.3%. But WTI crude oil is losing 1.9% and trading at $57.12 per barrel with folks increasingly concerned that Beijing, the world’s top importer of the critical liquid, won’t buy as many barrels against the backdrop of reduced exports to the United States.

Bracing for Price Pressure

In reflection of the bump in inflation expectations, a crucial consideration for investors is which asset classes benefit from an uptick in prices. Remember 2023 and 2024, years featuring elevated cost pressures that still managed to post US stock gains in excess of 20% per annum. Equity tickers and earnings are priced in nominal, and not real terms, which are adjusted for inflation, offering shares an additional pathway of appreciation. But economic downturns aren’t positive for corporate profitability; nevertheless, I believe that shall a contraction occur, it would be a short one. Right now, the Trump policy mix of trade duels and government spending reductions is dominating the conversation, but in a few months, I expect the focus to shift toward lighter taxation, milder regulations and low energy prices. Finally, another tailwind coming through the pipeline will be a substantial increase in capital expenditures, although they have been softening recently due to the lack of clarity on the horizon. Once the clouds clear, however, we will be talking about robust business investment momentum alongside the progress in onshoring manufacturing.

International Roundup

South Korea Unemployment Rate Climbs

South Korea’s unemployment rate climbed from 2.7% in February to 2.9% last month, its first increase since December of last year, when the rate moved from 2.7% to 3.7%, according to Statistics Korea. On a y/y basis, the number of employed persons climbed 0.7% while the labor force participation rate increased 0.3%. Relative to February, however, the number of working individuals fell from 940,000 to 918,000. In a related development, the manufacturing sector, which tends to employee younger workers, shed jobs, resulting in the number of employed individuals aged 15 to 29 declining by 206,000, marking the fourth-consecutive month in which the metric dropped by more than 200,000.

Household Confidence Drops in Japan

Household confidence in Japan dropped from 34.8 in February to 34.1 last month, missing the analyst expectation for 34.7, according to the country’s Cabinet Office. It sank to the lowest level in two years. The confidence gauge’s overall livelihood component descended from 31.5 to 30.9 and the employment measurement fell from 40.9 to 39.2. Income expectations also deteriorated, sinking from 39.5 to 38.8 while willingness to buy durable was an exception, climbing from 27.1 to 27.3. 

But Machine Orders Accelerate

Orders for machinery grew 27.8% m/m in March after climbing only 1.8% in the preceding month. On a y/y basis, orders surged 11.4% y/y last month, up from the 3.5% increase in February, according to the Japan Machine Tool Builders’ Association. It was the sixth-straight month of increases. While orders from foreign customers expanded 17.9% domestic activity weakened.