By Peter Gibson, Chief Investment Officer
What’s Happening
The rollout of tariffs on April 2 kickstarted a new round of volatility in global financial markets, with ensuing tariff responses from Canada and China further impacting financial markets. The effects are being felt in virtually all corners, as commodities like gold and oil are dropping while equities and bonds are also posting large declines. Since the beginning of the week, yields have declined by nearly 40 bps, with the largest declines on shorter-dated maturities. Meanwhile, US equities are down by over 6% over the same time period.
In addition, the odds of Fed rate cuts have spiked, with four 25 bps rate cuts now priced in for the year with the first rate cut priced in for June’s FOMC meeting. Fed Funds futures currently have the year-end 2025 target rate at 3.24%. Financial markets largely ignored the monthly payrolls data which was released Friday morning. The data showed a robust jobs gain in March which was offset by downward revisions to prior months and an increase in the unemployment rate.
Why It’s Happening
The significant moves are being driven by financial markets participants’ views that that drastic increases in tariffs are going to slow the US economy, negatively impacting growth while pushing prices higher. In remarks at a conference Friday morning, Fed Chair Powell indicated that the tariffs were larger than expected and could have a persistent inflation impact, moving away from the transitory label used at the last FOMC meeting.
While policymakers are focused on the backward-looking economic data, markets and financial decision makers are looking forward to the expected impacts of the announced policies. This is made more challenging by the volatility triggered by these moves, making the current market moves more indicative of the current level of uncertainty. This makes it more challenging to rely upon the longer-term signals given by the moves in financial markets.
What’s The Impact
The drop in interest rates has the most direct impact on credit union balance sheets as investment rates have moved lower and loan rates may likely be pressured lower in coming weeks. Looking forward, overnight investment rates are now projected to move lower much quicker than previously expected as the economy slows.
Should the economy slow as expected, the challenges of lower asset yields are likely to be paired with higher delinquencies and losses on consumer loans. While labor market data has not shown significant weakness to date, a further increase in loan delinquencies will stress credit union’s projected earnings.