Following the much-hyped Liberation Day, Andrzej Skiba, Head of BlueBay US Fixed Income, gives his first thoughts on the implications of tariffs for economies and markets.
Key takeaways
President Trump has announced reciprocal country tariffs, many of which exceeded market expectations.
In our view, investors were hoping for a much more benign outcome.
Markets reacted negatively, as the last vestiges of trade war complacency were swept away.
We should now expect an even greater upward pressure on inflation, possibly above 1.5%.
While a trade escalation is clearly negative for growth, we do not believe a US recession is on the horizon.
We’ve held a view since the election that Trump is serious about tariffs and market hopes of a piecemeal, inconsequential trade escalation were naive.
Trump’s tariffs: the details
Amongst major trade partners, we highlight EU (19% of US imports) at 20%, China (13% of US imports) at 34%, Japan (5% of US imports) at 24%, Taiwan (4% of US imports) at 32%, South Korea (4% of US imports) at 25%, India (3% of US imports) at 26%, and the UK (2% of US imports) at 10%.
25% foreign auto tariffs were also announced, although these are not on top of reciprocal tariffs.
Canada and Mexico were spared reciprocal tariffs, however they will be subject to previously announced 25% auto tariffs. These two countries represent about one-third of all US imports.
A "de minimis" exemption for low value imports from China was closed, while a number of goods categories were exempted from the tariffs: copper, pharmaceuticals, semiconductors, lumber, energy, and some minerals.
Asia fared the worst in this round of tariffs, while Latin America did comparably better, with Europe somewhere in between.
Our views
Overall, we calculate an average reciprocal tariff of less than 20% in yesterday’s announcements, helped by Canada and Mexico missing from the list and by having a number of exempted goods categories. While this is better than some feared (20% number was often mentioned in recent days), we believe that many investors were hoping for a much more benign outcome. This, in our view, explains the sharply negative stock market reaction as the last vestiges of trade war complacency were swept away.
Over the coming days, we expect retaliation tariffs to be announced by many countries/trading blocs, though at the same time, a range of concessions are likely to be presented. As previously mentioned, there is a good likelihood that some of the increases will be unwound as trading partners offer concessions, however, we expect the bulk of the increases to stay.
Tariffs are likely to be inflationary. We previously expected a 1% increase in headline CPI, assuming 10% average tariffs. With the final number likely higher, we should expect an even greater upward pressure on inflation, possibly in excess of 1.5%. This is likely to prevent the Fed from cutting rates over the coming months, even if the economy slows down.
While a trade escalation is clearly negative for growth (we see US growth moderating to 1.5% with some downside risks to this number), we do not believe a US recession is on the horizon, in the same way that we did not believe it would happen in 2022.
This time around the Fed is not hiking rates aggressively into a slowing economy. Worst case is a ‘higher for longer’ scenario rather than rate hikes (the bar for those is very high, in our view).
The outlook
We do not believe that markets can rebound aggressively after yesterday’s announcement, as trade-related headlines will keep pouring in over the coming weeks, and investors will likely worry about growth implications until hard data dispels some of these fears.
It is, however, perfectly plausible to see a partial reversal of recent price declines as market indicators point to exceedingly bearish short-term sentiment.