Everyone from economists to Federal Reserve bank presidents shivered this week as President Donald Trump formally signed a plan to impose tariffs on steel and aluminum imports against foreign countries that swap goods with the U.S.

The proposal, which places a 25 percent tariff on steel and a 10 percent levy on aluminum, exempts some close U.S. allies such as Mexico and Canada; Trump said Australia might be granted an exemption, as well. The measure gives Trump the ability to raise or lower the tariffs on a country-by-country basis and add or take countries off the list whenever he wants. The tariffs take effect in two weeks.

Trump said he’s open to adjusting the tariffs for individual nations “as long as we can agree on a way to ensure that their products no longer threaten our security.” Countries will have to convince Trump there are “satisfactory alternative means” for resolving trade inequities, CNBC reported.

Trump’s push for new tariffs raised the ire of foreign allies and sparked fears of an impending trade war with China and the European Union, in particular. On Wednesday, EU officials announced an array of tariffs on American-made goods that they will impose if the U.S. proceeds with imposing duty taxes on imports. A shortlist of those items includes steel, T-shirts, bed linen, bourbon, chewing tobacco, cranberries and orange juice, among many other products, according to The New York Times.

Earlier this week, Trump said the only way the U.S. will reverse course is if a new North American Free Trade Agreement is signed.

His stalwart stance has drawn sharp rebuke from lawmakers and central bankers alike, some of whom weighed in on the topic this week while detailing the rationale behind the Fed’s forecast for hiking interest rates three times this year.

On Monday, Robert Kaplan, president of the Federal Reserve Bank of Dallas, said any measure that would hurt the country’s relationship with its trading partners would be the same as the U.S. acting against its own interests. He also said it was too early to determine how the fallout from tariffs would affect the economy, and so he avoided changing his forecast for three interest rate hikes this year.

Two days later, Atlanta Federal Reserve Bank President Raphael Bostic balked at Trump’s comment that trade wars were fun and “easily winnable,” saying that “protectionism is often not helpful for the broader economy. You have wins on one side, but you have costs and losses on the other side, and how that all shakes out is often not positive.”

Cohn bows out

Even the Trump administration has experienced fallout from Trump’s tariffs decision. Gary Cohn, the White House’s chief economic adviser, resigned from his job Tuesday after reportedly losing the fight over the tariffs issue.

Markets panicked, forcing some stocks to open lower and others to wobble Wednesday. The Dow Jones fell 400 points , the S&P 500 shed about six points while the Nasdaq added 12 points. The yield on the 10-year Treasury fell three basis points to 2.85 percent. Markets rebounded later in the afternoon after the Trump administration said some countries would be exempt from the tariffs.

The negative reaction makes sense. Investors considered Cohn, a former Goldman Sachs executive who was also director of the National Economic Council, as a stabilizing, level-headed force within an administration beset with inner conflict and turmoil. And he was instrumental in crafting the business-friendly corporate tax cuts Congress signed into law.

Cohn’s exit reinforces speculation that Trump is adopting a protectionist philosophy, which ultimately could endanger economic growth and expansion if foreign allies are alienated and a trade war erupts. Cohn was a staunch advocate of free trade and global cooperation. His departure rattles business leaders concerned about whether his replacement will be as nationalistic as Trump or as open to foreign trade as Cohn.

Prepare for Wall Street to remain anxious until a replacement is announced.

Huge month for jobs

The U.S. economy added 313,000 jobs in February, exceeding economists’ expectations and reinforcing sentiment that the labor market is heating up. Stocks jumped after the Labor Department released the report Friday, with the Dow Jones opening more than 150 points higher on the news.

Construction, retail and professional business services saw the biggest gains, with manufacturing, financial activities, health care and mining following suit. The robust report paves the way for the Fed to raise interest rates when it meets later this month.

February’s massive job gains is the biggest the economy’s experienced since October 2015. Economists expected the labor force to grow by 200,000 jobs last month. Unemployment remained the same at 4.1 percent while the labor force participation rate rebounded to 63 percent.

Yet, wage growth continues to disappoint. Wages grew a mere 0.1 percent in February, dropping the year-over-year increase to 2.6 percent. As bad as it sounds, for Wall Street, slow wage growth is good news because it means wage inflation isn’t building and the economy is entering a “Goldilocks” state of balance.

Bond market reaction remained relatively benign after the jobs report as the 10 year Treasury note moved slightly higher in yield to 2.897 percent. We need to watch this over the coming days as 2.90 percent is considered an important support level for bonds. Any close higher than 2.90 percent will have the markets looking to 3 percent as the next stop.

The common theme lately is to expect more volatility in the coming weeks and months until we get some real certainty around the economy and inflation.

In other mortgage news…
  • Amazon announced this week plans to partner with major Wall Street banks to begin offering consumers checking accounts. The accounts would be geared at younger customers and people without existing bank accounts. This is one of the glaring indications we’ve had that Amazon may seek to disrupt the banking industry.
  • HUD Secretary and former neurosurgeon Ben Carson said in an interview with The New York Times this week that running the agency is more difficult than brain surgery. This comes after reports that morale within the agency has hit all-time lows following a brief debacle over Carson authorizing spending $31,000 for a customized hardwood dining room table, chairs, sideboard and hutch for his office.
  • Despite rising interest rates, mortgage applications increased 0.3 percent for the week ending March 2, according to the Mortgage Bankers Association.
  • Confidence in the housing market fell slightly in February, according to Fannie Mae’s Home Purchase Sentiment Index. The index fell 3.7 points in February to 85.8 as the percentage of Americans who say now is a good time to buy decreased to 22 percent.

A new report from Trulia shows that housing is more affordable today than it was 40 years ago, and that the median household can afford a home 1.5 times more expensive than the median home price. The report also shows that mortgage rates would need to grow to 9.4 percent before the median home becomes unaffordable nationally. Check out this blog I wrote last year about how historically low mortgage rates still make homeownership the most affordable housing option.


About the Author:

Greg Richardson - EVP of Capital Markets

Greg Richardson is Movement's EVP of Capital Markets and a contributing author to the Movement Blog. His weekly market update is a must-read commentary on financial markets, the mortgage industry and interest rates. Greg is an industry veteran who knows how to read the financial tea leaves and make complex industry data easy for loan officers, real estate agents and homebuyers to understand.