In a surprise announcement to everyone outside his inner circle, President Trump has decided to levy a 5% tariff on all goods imported to the U.S. from Mexico. Trump said he would continue to “gradually increase” the tax until immigration from the southern border is “remedied.” By this he means illegal immigrants from the south should “STOP.”
The 5% tariff scheduled to take effect Saturday, June 1st is just the beginning: on July 1st this tariff would raise to 10%, 15% by August 1st, 20% by September 1st and 25% on October 1st. This 25% tax on all Mexican imports would persist “unless and until Mexico substantially stops the illegal inflow of aliens coming through its territory.” What “substantially stopping” illegal immigration of the southern border means has yet to be clearly determined.
As a result, the bottom fell out of index futures this morning, with the Dow in the red nearly 300 points. Futures have clawed back somewhat since then on some better-than-expected economic reads, but aggressive tariff policy against Mexico — putting in jeopardy the USMCA trade agreement signed with the neighboring government last fall. Mexican President Lopez Obrador (known as AMLO) is reportedly sending his foreign minister to Washington DC today.
Personal Income for April performed better than expected: +0.5% versus the estimated +0.3% and the previous month’s +0.1%. With sluggish wage growth hanging onto this sustained rally toward full employment, this comes as good news that a breakthrough may finally be in view.
Consumer Spending for April, at +0.3%, is also an improvement from the +0.2% expected, though down from the +0.9% in March. This speaks directly to consumer confidence, which we’ve already seen recently at its highest level in many quarters. The PCE price index is up 1.5% year over year.
We now wrap the worst trading month in quite some time. Trade pressures here at the end of Q1 earnings season — heading into the lower-volume summer trading months — threaten to knock domestic economic growth off its stride. For sure the Trump administration is taking a gamble instituting such harsh trade policy against its closest partners, but perhaps the administration — now under fire in the House with possible impeachment proceedings — feels a gamble of this magnitude is what it needs to set its fortunes right again.