SIFs Sink on Trump Tariff Threats

STOCK INDEX FUTURES

Index futures are lower, falling sharply after President Trump threatened Apple with 25% tariffs on iPhones not made in the US and 50% tariffs on the EU Friday morning.

Indexes ended flat Thursday but were initially boosted by data showing growing private-sector activity and lower-than-expected initial jobless claims. Manufacturing and services PMIs for the month of May both rose to 52.3, beating expectations and rising well above April’s readings of 50.2 for manufacturing and 50.8 for services. Weekly initial jobless claims came in lower than expectations, with 227,000 new claims vs. an expected 230,000 and slightly lower than the previous week’s 229,000 claims.

Existing home sales for April fell below expectations with sales of 4.00 million, below an expected 4.15 million and 5.9% lower than March’s 4.02 million. Building permits fell less than expected, with a monthly change of -4% when economists were expecting a contraction of 4.7%. A slowdown in the construction industry could have major implications for the labor market in the future, as 11% of the male workforce in the US is employed in the construction industry. New home sales for April are due at 9:00 a.m. Central Time and are expected to show 694,000 sales, a drawdown from March’s 724,000.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve, extending Thursday’s gains as investors pile into bonds after recent tariff threats from President Trump. Thursday saw Treasurys gain strength from data suggesting a resilient labor market and expanding private sector growth in the manufacturing and services sectors. The strength of the US labor market is giving the Fed more room to hold rates steady while it waits to see how tariffs will impact inflation.

Despite yields easing, worries over a gaping budget deficit remain in the Treasury market as investors are demanding a higher premium for holding onto longer-term bonds. The 30-year yield reached 5.145% Thursday, which is a level not seen since 2007. Most of the selling in the bond market has been at the long end of the curve, driven by concerns of long-term inflation resulting from President Trump’s tariffs and tax cuts.

The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year to finance the government’s growing debt problem. US public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade. Investors are worried that an increase in bond issuance will outpace demand, as recent Treasury auctions have been met with tepid demand, although foreign demand remains stable.

The 10-year Treasury yield is below 4.5%, and the 30-year yield is just above 5%. The spread between the two- and 10-year yields decreased to 55 bps from 59 bps Thursday.

Markets are pricing 50 bps of rate cuts from the Fed by year-end, with the first cut coming at September’s meeting.

CURRENCY FUTURES

June USD index futures are lower against most major currencies but gained strength in the wake of President Trump’s tariff threats. The index finished higher Thursday, fueled by strong manufacturing and services PMI data and a weaker-than-expected weekly initial jobless claims report. The labor market has held up well so far into May, per weekly jobless claims data, adding to expectations that the Fed may hold rates for longer, offering support for the greenback.

As a tax-cut bill that could add two to three trillion to federal debt heads to the Senate, concerns in the bond market have spilled over to the dollar as investors worry that the debt is reaching unsustainable levels. Reduced demand for Treasurys and weakening confidence in the US fiscal outlook have weighed on dollar strength over the last week.

British pound futures are higher after UK retail sales grew more than expected with month-over-month growth of 1.2%, beating expectations of 0.3%, and steeply higher than March’s growth of 0.1%. Higher inflationary pressures on the pound could result in a more gradual monetary easing from the Bank of England, offering support to the pound.

June euro futures are higher but lost some strength in the aftermath of President Trump’s threat to impose 50% tariffs on the bloc due to a lack of progress in trade deals. German Q1 GDP rose 0.4%, beating estimates, driven by exports and manufacturing. Exports surged 3.2%, especially pharmaceuticals and vehicles, likely due to US tariff concerns.

Japanese yen futures are higher on strong core inflation data. Japan’s core inflation rate grew more than expected to 3.5%, the highest in over two years. The strong reading adds to expectations that the Bank of Japan will continue to tighten monetary policy, adding support to the yen.

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