Market Reaction to Trump’s Threat
The market reaction to Trump’s threat last week was interesting, with US equities and short-dated yields falling, and the dollar weakening. This reaction suggests that some investors are watching the tail-risk of a miscalculation in US-China tensions.
Understanding the Reaction
Many of Trump’s recent tariff threats have fallen on deaf ears, but this time, the reaction was different. Lynn Song argues that China has proven incredibly resilient to US tariffs, helped by offsetting demand from elsewhere in the world, and backed by its higher-value export industries, which are less dependent on American demand.
Impact on the Economy
The jobs market is creaking, and inflation is remarkably benign, six months on from ‘Liberation Day’. The thinking is that further tariffs would require more Fed easing, not less. This is evident from the fact that investors think the Fed will have to intervene to mitigate the effects of the tariffs.
Upcoming Data
Good news for investors, official US data is finally coming next Friday. However, the shutdown and the resultant data drought are showing little sign of coming to a close. James Knightley, a US economist, reckons there is more tariff-induced price pressure to come.
Tariff Revenues
Tariff revenues over the summer amounted to 10% of imports, a significant undershoot on the 18% expected based on what’s been announced and 2024 import data. Either corporates will have to keep absorbing that extra hit in their margins, or more likely, firms will start to pass on the costs.
Price Increases
Price increases feel like a matter of time, especially in the car industry, which is a significant area of US tariffs. A fire at a key aluminum supplier to the auto industry won’t help matters. New vehicle prices have remained essentially flat, but this is likely to change soon.
Inflation and Rate Cuts
The fact that the tariff hit has been more spread out means we’re looking at a lower, but more drawn-out peak for US inflation. The disinflationary forces at work, chiefly slowing rental inflation, will have a more noticeable effect. This is why we’re still expecting a further four Fed rate cuts, more than the committee itself indicated at the time of its September meeting.
The Supreme Court Ruling
The Supreme Court will start hearing arguments in early November against the use of emergency powers to impose sweeping country-level tariffs. If the President’s tariffs are ruled illegal, the president does have means of replacing them, but the net result would still probably be a lower effective tariff rate across US imports.
Impact on the Economy
A ruling against tariffs imposed under emergency powers would presumably spark chaos, given that firms would likely be due a refund on the bulk of the tariffs paid so far. Uncertainty about what tariffs would come in their place would likely keep a lid on sentiment. This would also impact the jobs market and the fiscal deficit.
Conclusion
Tariffs have re-entered the chat, and they’re giving main character energy this autumn. The outcome of the Supreme Court ruling will be crucial in determining the future of the economy. One thing is certain, the tariffs will continue to have a significant impact on the economy, and investors will be watching closely. As the situation unfolds, it’s essential to stay informed and adapt to the changing landscape. The future of the economy is uncertain, but one thing is clear, tariffs will play a significant role in shaping it.
