I was struck by how Michael Gapen, a Morgan Stanley economist, explained his lingering concerns about the tariff fallout on our show yesterday. "I worry about a 'sudden stop' in U.S. trade," he said--using a term typically reserved for emerging markets. 

And with good reason, because the U.S. has been acting more like a delicate third-world market this week than the world's biggest economy and reserve currency. Typically in a stock market panic, our Treasury yields plunge as investors pile into safe havens, and the dollar surges. But this week, the opposite is happening. Yields are spiking, and the dollar is tumbling. "The world's hot new trade is 'sell America,'" wrote Axios. 

"Rare, ugly, and worrying," wrote Krishna Guha at Evercore. And it continues this morning--the 10-year was at 4.52%, up from below 3.9% on Monday. The 30-year is near 5%. And the dollar index has sunk below 100, a ten percent drop from its highs two months ago. "We are NOT out of the woods," warned billionaire investor Mike Novogratz on X yesterday. 

The concern centers around the still-sky-high 145% tariff on most Chinese goods. That's not just a tariff--that's practically an embargo, as many have observed. We've already seen reports of Amazon and other retailers refusing to take shipments of Chinese imports this week. The problem is that the cash we use to buy those goods often gets recycled back as their purchases of our Treasury bonds. 

So did the tariffs suddenly--and accidentally--pull the plug on our own bond markets? Or are the Chinese and others deliberately refusing to buy Treasuries as a form of retaliation? Either way, it appears that markets aren't done trying to force President Trump to back off. And it doesn't help that we also learned yesterday that our budget deficit--which we fund with Treasuries--is still soaring. 

"If this fight with China doesn't end soon, Polymarket should start adding a prediction of an over/under on how many months before U.S. shelves start emptying out," wrote Peter Boockvar in a client note this morning. "Because of all these risks, I think a deal happens soon."

If it doesn't, the risks to both actual trade and to America's precarious fiscal position will grow. "If the U.S. economy further slows and enters a recession," which Larry Fink told CNBC this morning we are "very close" to being in, "our budget deficit relative to GDP will go north of 10%, and you'll see a real flood of [Treasury] supply just as others turn their back," Boockvar added. 

And in another uncomfortable sign, we just learned that consumer sentiment fell further this month to rival the worst reading in its 70+ year history, from June 2022, when inflation peaked post-pandemic. Near-term inflation expectations hit a 44-year high of 6.7%.

"Consumers report multiple warning signs that raise the risk of recession," survey director Joanne Hsu wrote, as their expectations for inflation, their income, the labor market, and business conditions all worsened. 

How does the White House now respond? That remains the essential question. 

See you at 1 p.m...

Kelly 

Twitter: @KellyCNBC

Instagram: @realkellyevans