Already having laid off the highest number of employees in nearly a decade and attempting to recover from a year in which declining global car sales likely reduced world GDP by 0.2%, the auto industry is facing a direct hit from President Trump's threatened tariffs on all goods from Mexico.

Trump said the U.S. would add 5% tariffs on all Mexican imports "until such time as illegal migrants coming through Mexico, and into our Country, STOP," in a tweet late Thursday night.

• The White House followed up saying that if the situation at the border isn't resolved, tariffs on Mexican goods will rise by 5 percentage points each month, as high as 25% on Oct. 1.

Why it matters: Mexico recently became the No. 1 trading partner with the U.S., and a significant percentage of that trade is completed by auto companies. Much of the "trade" is American auto companies exchanging parts, goods and services within entities they own, Deutsche Bank Securities chief economist Torsten Slok pointed out in a note to clients Thursday night.

• "Trade with Mexico is basically all about the supply chain, which essentially is all about cars."

The auto industry was already facing trouble, as ratings agency Fitch's chief economist Brian Coulton and analyst Pawel Borowski wrote in a report released Tuesday.

• "The risk of increased tariffs on global auto trade remains real and would be a significant drag on global GDP if it were to materialize."
• "The global nature of auto production makes the sector particularly vulnerable to an increase in tariffs."

The big picture: In addition to impacting consumers and company bottom lines, the tariffs are likely to impact jobs.

• The auto industry is in the midst of a "significant shift," outplacement firm Challenger, Gray & Christmas reported earlier this month, as automakers face changing consumer demands and the implementation of automation.
• The industry announced 19,802 job cuts through April. That is 207% higher than announced through the same period last year.
• The total announced cuts for the first 4 months of this year is the highest since 2009, when 101,036 cuts were announced in the auto sector through April.

American companies have fared particularly poorly, exemplified by Ford's May 20 announcement that it would cut 10% of its salaried workforce. Six months earlier, General Motors announced the closure of 5 plants and 14,000 job cuts. Tesla announced over 3,000 job cuts in January.

The market did not take Trump's Mexico tweet well.

• The Mexican peso fell almost 2% against the dollar to its lowest value since early March.
• Yields on the 2-year U.S. Treasury note dropped below 2% for the first time since February 2018, and to the lowest since September 2017 on the benchmark 10-year note.
• S&P 500 futures were lower by 1.2%, London's FTSE 100 fell more than 1%.
• Chinese shares were slightly lower, falling by around 0.2%. Germany's DAX was off by more than 1.5%.
• Shares of Ford lost 4% in pre-market trade. GM dropped more than 5%.

By the way: "Imposing these tariffs is in principle, not allowed under the free trade agreement currently in place between Mexico and the United States or under WTO general frameworks," wrote Tania Escobedo, strategist at RBC Capital Markets.

• "It is likely, however, that Trump will claim the measure is a matter of national security, referring to the International Emergency Economic Powers Act (IEEPA)."

Our thought bubble, via Axios' Felix Salmon: Strategically, it makes zero sense for the U.S. to enter a two-front trade war, engaging Mexico even as the confrontation with China is reaching a boiling point. China and Mexico are 2 of America's 3 largest trading partners. To start trade wars with both of them is a declaration of isolationism not seen since 1945.

In a toned-down and largely peaceable 2-page letter, Mexican President Andrés Manuel López Obrador wrote to President Trump that he disagreed with his decision to add 5% blanket tariffs to all Mexican goods.

Details: "With all due respect, although you have the right to express it, 'America First' is a fallacy because until the end of times, even beyond national borders, justice and universal fraternity will prevail," AMLO wrote.

• He added that Mexico wanted to avoid a confrontation with the U.S. on the issue of Central American migrants coming through Mexico to the U.S., and was doing "as much as possible" to stem the flow "without violating human rights."

What to watch: The Mexican president also ordered his foreign minister to travel to Washington on Friday and Jesus Seade, AMLO's trade negotiator, said that if the tariffs are implemented, "we should respond in a forceful way."

Trump's tweet further accelerated expectations of interest rate cuts from the Fed this year.

Early Friday morning, Fed fund futures prices showed the chances of the Fed not cutting U.S. interest rates by its Dec. 11 meeting had fallen below 10%, with the probability of cutting rates at least 2 times rising to 61%, according to CME Group's FedWatch tool.

• The likelihood of 2 rate cuts or more was just 25% on April 30.
• Fed Chair Jay Powell and other policymakers have said the central bank does not plan to cut rates even once in 2019.

"The story here is that market participants anticipate the Fed will need to cut rates to maintain the [economic] expansion," University of Oregon economics professor Tim Duy wrote early Friday morning.

• "The Fed has so far resisted this story, but the odds favor them moving in this direction. The simple fact is that the Fed reacts systematically to a changing forecast. Financial markets are signaling the the growth forecast will worsen enough, or that the risks to the growth forecast will become sufficiently one-sided, that the Fed will have to act."

Flashback: Two rate cuts, or a reduction of the Fed funds rate by 50 basis points, is exactly what Trump's economic adviser Larry Kudlow told me the White House wanted back in March.

Chinese manufacturing activity fell into contraction in May for the first time since December, data released overnight showed.

The official manufacturing Purchasing Managers’ Index (PMI) reading was 49.4, lower than economists polled by Reuters had forecast, and down from last month's reading of 50.1.

• "Obviously, the investor concern is now shifting from the sustainability of Chinese growth recovery to how fast the economy is slowing," Jian Chang, chief China economist at Barclays Asia Pacific said on CNBC’s "Street Signs."
• The most recent U.S. tariff hike "clearly played a role in driving down China's orders and demand and also consumer and business sentiment."

It's the latest major piece of Chinese economic data to sink. Exports fell in April, the country’s retail sales drifted lower, and industrial profits slumped.

What's next? "The Chinese slowdown we’ve seen happening, even before the concerns around trade, has really impacted Europe" where manufacturing PMI growth has been deteriorating for 3 straight months, Emily Roland, Head of Capital Markets Research at John Hancock Investment Management, tells Axios.

• "I think until you see that turn around I don’t see a major rebound overseas. ... China is the linchpin to all of it."