President Trump implemented delayed tariffs on Canada, Mexico, and China, triggering swift retaliation. Markets remain skeptical about permanence, while stagflation fears grow as inflation expectations hit 30-year highs amid concerns of slowing economic activity. Key employment data expected Friday could intensify these worries, potentially weakening Treasury yields and the dollar's safe-haven status.

Trump Pushes Tariffs Forward, Yet Markets Remain Skeptical

As U.S. President Donald Trump continues to follow through on his tariff threats one by one, concerns over their potential impact on the U.S. economy are mounting, and the world's reserve currency, the dollar, is losing strength.

On Tuesday, Trump implemented the tariffs he had postponed for a month on key trade partners. Most goods imported from Canada and Mexico will now be subject to a 25% tariff, while energy products from Canada will face a 10% levy.

Additionally, Trump has carried out the 10% tariff increase on China that he promised last week, raising the total additional duties on Chinese imports to 20%.

Trump's moves were met with swift retaliation from Canada and China. While China announced it would impose counter-tariffs of up to 15% on certain food and agricultural products, Canada revealed plans to gradually introduce tariffs on approximately $100 billion worth of U.S. goods.

Meanwhile, although Mexico has vowed to announce countermeasures on March 9, President Claudia Sheinbaum is maintaining a calm stance, seeking a path for negotiations with Trump.

During a speech to Congress on Tuesday, President Trump defended the tariffs, claiming they were about making America wealthy again and restoring its greatness. Acknowledging that there might be some "disturbance" in the adjustment period, Trump downplayed the impact, saying it wouldn't be significant and that he was willing to accept it.

Moreover, Trump reiterated his threat to impose a 25% tariff on aluminum and steel and to apply reciprocal taxes against any country that restricts U.S. imports, declaring, "We're just getting started."

Trump's latest tariff actions have reinforced the perception of his seriousness on the matter. Previously, his contradictory statements had led many to believe that he was merely using tariff threats as a negotiating tool and would refrain from enforcing them aggressively. However, with Trump, ruling out any possibility of negotiation is never a certainty.

During his congressional speech, Trump made it clear that if Canada retaliates, the U.S. will respond with equivalent tariff increases, demonstrating his reluctance to consider exemptions. However, the market reaction suggests that investors are not fully convinced that these tariffs will be permanent or that more will follow.

Indeed, U.S. Commerce Secretary Howard Lutnick pointed to the U.S.-Mexico-Canada trade agreement, stating that if Trump's conditions were met, a middle ground could be reached. This was interpreted as the first public signal that the tariffs on Mexico and Canada might be open to negotiation.

Stagflation Fears Dominate Markets Amid Tariff Uncertainty

As uncertainties surrounding tariffs and their potential impact on the U.S. economy persist, there is a widespread view that tariffs will increase price pressures---inflation expectations are at their highest level in nearly thirty years. However, the prevailing narrative in recent days has been that tariffs will slow down economic activity.

This narrative was echoed by New York Federal Reserve Bank President John Williams, who emphasized the need to assess how tariffs could impact economic activity. According to him, the key uncertainty is how tariffs will influence business investment decisions and consumer spending. Williams also predicted that tariffs would contribute to inflation and that these effects would become evident later in the year.

Fed officials continue to stress that monetary policy should remain restrictive until more concrete evidence emerges regarding the impact of tariffs on prices. However, recent data suggests that the U.S. economy softened somewhat at the beginning of the year. With inflation remaining sticky and concerns about slowing growth intensifying, speculation about stagflation has increased.

In such a scenario, policymakers would face tough decisions between fighting inflation and supporting employment. Futures markets anticipate that the Fed will be forced to continue cutting interest rates this year, pricing in approximately three-quarters of a percentage point in reductions.

As Duhani Capital Research, we believe that stagflation concerns could continue to weigh on markets until further data provides more clarity on the performance of the U.S. economy. These concerns are likely to keep expectations of Fed rate cuts alive and continue to pressure the U.S. dollar.

This week, key data releases will offer more insight into the U.S. economy's performance, including PMI figures, factory orders, and critical employment reports.

The job figures will be particularly crucial for Fed expectations. Economists' median forecast predicts that 160,000 new jobs were added in February, with unemployment remaining stable.

However, data released on Tuesday by Intuit, a company providing accounting and payroll software for many small and medium-sized businesses, indicated that payrolls at companies employing fewer than ten people dropped by approximately 125,000 compared to the previous month.

If Friday's official data reflects similar weakness, stagflation concerns could intensify. Such a scenario could strengthen headwinds against U.S. Treasury yields and prompt questions about the U.S. dollar's traditional safe-haven status. Meanwhile, growing doubts about the resilience of the world's largest economy could drive capital flows toward emerging markets, particularly in Asia, and enhance gold's appeal.

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