Trump's global trade war threatens to drag U.S. economic growth and potentially push the economy into a recession. Traders are now betting that the Federal Reserve will cut rates three times this year, each by 25 basis points. This marks the first time such expectations have emerged since mid-December last year.

 U.S. President Donald Trump announced that the first-ever 25% tariffs on Canadian and Mexican goods would officially take effect on Tuesday, while tariffs on Chinese goods will double to 20%. China, Canada, and Mexico are all major U.S. trading partners, collectively accounting for 40% of U.S. import and export volumes.

Following this new round of tariff threats, China, Canada, and Mexico also announced corresponding countermeasures. China has imposed an additional 10-15% tariff on U.S. agricultural goods, while Canada has threatened a 25% tariff on $100 billion worth of U.S. imports starting next month. Meanwhile, Mexico is evaluating retaliatory tariffs, which are expected to be announced on Sunday.

The U.S. two-year Treasury yield, which is sensitive to policy changes, fell by 6 basis points to 3.89% on Tuesday, marking its lowest level since October last year. The 10-year Treasury yield fell to 4.136%, its lowest level since December.

Fed watchers now expect three rate cuts by the end of the year, which would bring rates down to the 3.50-3.75% range. The escalating trade tensions have heightened concerns about the U.S. economic outlook. Factory activity data released this week showed that U.S. manufacturing activity is nearing stagnation, making the upcoming jobs market report even more critical.

Our view remains that tariffs are not an inflation story but a growth story, said Mohit Kumar, Chief Economist and Strategist for Europe at Jefferies. He expects steeper yield curves, particularly in the UK and Germany.

For market participants, the implementation of U.S. tariffs marks a turning point, indicating that Trump is not merely using tariffs as a bargaining tool but is following through with action.

The market has broadly believed that the first phase of the Fed's rate-cutting cycle has ended. Some investors had previously expected that policymakers would not cut rates further this year. However, with Trump's policies, everything may change.