Tariffs, tariffs, tariffs.  The uncertainty on how tariffs will impact the U.S. and global economies is the top issue in the stock and bond markets today.

Bond investors rely upon sophisticated models to attempt to predict future levels of economic growth, demand for borrowing, the size of government deficits, the size of corporate and government future bond issuances and the future levels of inflation. These models give bond investors estimates of the direction of future interest rates and what the investors will likely see in their total return on their bond investment, including their expected rates of return above inflation rates.

If tariffs are in place for a long time and don’t change, bond investors can estimate how they impact economic activity and how they impact consumer prices, and these factors can be built into their models to attempt to predict future interest and inflation rates.

When tariffs are used as a negotiation tool, it is not known how long they will be in place, which then makes it harder to estimate their short term and long-term impact on manufacturing activities and consumer prices. As a general statement, tariffs usually are viewed to increase consumer prices in the short term, but over time the price impact declines as manufacturing activity shifts to either the U.S. or to other countries with lower or zero tariffs.

The stock and bond markets are likely to be volatile today and for the next several days as the markets attempt to digest the impact of each of the new tariffs. There will be a flurry of political leaders praising and condemning the new tariffs, and it will be very difficult for the markets to predict how long each tariff will be in place, and what short term and long term impact the tariff will have on consumer inflation. As a general statement tariffs could have a short-term impact, but the long-term impact will likely decrease as manufacturers shift their production to geographies with more favorable tariff treatment.

Daily rate sheet volatility will likely be higher this week and next.