“…Key recession risks include the ongoing tariff impact (which we wrote about in the Daily Dose). In particular, the effective tariff rate is still only 10.5% (on latest data), while eventually it will reach around 15 – 16% (i.e. there is more money that will be taken out of the economy/more fiscal tightening to come). The impact of tariffs on inflation is also a concern (more on that below).…”
Source: Longview on Friday, 10th October: “US –> Downside Inflation Surprise Expected In 2026”
‘Tariff risk’ came back into sharp focus last Friday, after slipping from investors’ radars in recent months. Trump announced plans to impose 100% tariffs on Chinese goods, effective November 1 (or possibly sooner), i.e. in response to China’s enhanced export controls on rare earth minerals. Equities sold off sharply on that news, and there was a safe haven bid for Treasuries.
Even before that announcement, though, the impact of tariffs on the US economy was ramping up and, as we highlighted last week, was an under-appreciated risk in markets (see quote above). That is, US tariffs are effectively a fiscal tightening which will increasingly take money out of the economy. Furthermore, that tightening is happening at a time of slowing economic momentum. Money and credit growth, for example, are modest; real household disposable income growth is slow (demand is weak); government spending, excluding debt interest, is barely growing; and housing is still in recession. With that, US inflation should fall notably in 2026 (as we noted last week). All of which should push the Fed to ease more aggressively than is currently priced into the rates market.
Price action, in that respect, has been encouraging for the bulls on US Treasuries. In particular, yields have broken below their pennant pattern (fig 1) and the market’s view on inflation is starting to roll over (e.g. see US 5 & 10 year breakeven inflation rates, fig 2). Sentiment readings, though, are still ‘leaning bearish’, i.e. close to their (contrarian) buy signal threshold (fig 3). As such, and while positioning data was not updated last week due to the government shutdown, the case for further upside in Treasuries remains in-tact, both from a macro perspective, as well as from a technical and sentiment one.
Fig 1: US 10y bond yield (%), with 50 & 200 day moving averages
Fig 2: US 5 & 10 year breakeven inflation rates (%)
Fig 3: Sentiment towards US Treasuries* vs. 10y bond yield (NB scale INVERTED)
