Analysts at Bank of Montreal warn that the latest escalation in U.S.-China trade tensions is pushing markets further from any near-term resolution, increasing the likelihood of economic fallout that could include stagflation or even recession.
While markets still operate on the assumption that Trump is leveraging aggressive tariffs as a negotiating tactic aimed at securing meaningful concessions from Beijing, there is little evidence to suggest that a breakthrough is imminent. In fact, BMO notes that recent developments suggest a lengthier and more uncertain path toward any durable agreement between Washington and Beijing.
With the newly imposed levies, the trade-weighted average U.S. tariff on Chinese goods has jumped to around 30%, up from earlier estimates of 20%–22%. This sharp increase raises the risk of persistent inflationary pressures on imported goods, even as broader growth prospects dim.
In BMO’s assessment, if the bulk of these new tariffs remain in place, the “best worst-case” scenario would be a period of stagflation—characterised by stagnant growth and sticky inflation. The more severe downside risk would be a deeper economic recession, as real consumer spending begins to falter under the weight of higher prices and diminished purchasing power.
Perhaps most concerning for markets, BMO cautions that the recent volatility underscores the continued fragility of investor sentiment. The last several weeks have made it clear, they argue, that it’s still too early to call a bottom—whether in risk assets or in U.S. Treasury yields.
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ps. Globex has reopened for evening trade, S&P 500 and NASDAQ eminis have extended their falls:
