Trump goes for shock remedy | USAEMALL.com

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Good morning. Things happened in US markets before 4pm yesterday, but who knows what. The White House tariff announcement carried enough punch to erase investors’ short-term memory. Email us with thoughts on the new world: robert.armstrong@ft.com and aiden.reiter@ft.com.

Now it’s war

Historians may one day try to reconstruct how the Trump administration arrived at the tariff rates it announced yesterday. By then, the process will be of merely academic interest. This morning it is of no interest at all. What matters is that the US has struck an almost grotesquely aggressive posture towards its trading partners, leaving those countries — and investors — guessing how long it can hold the pose.

We wrote earlier in the week that the Wall Street consensus for “liberation day” was the average US tariff rate rising to 10-20 per cent, with most analysts in the bottom half of that range. The announced combination of a minimum rate of 10 per cent and much higher rates on specific countries will push the number to the top end of that range and perhaps much higher. Neil Shearing at Capital Economic calculates a 19 per cent average rate; Omair Sharif of Inflation Insights ran the numbers and arrived at an estimate of 25-30 per cent. It is characteristic of the Trump White House that such a consequential announcement would leave room for disagreement about the facts.

The tariff rate proposed on China and Asian countries such as Vietnam, Cambodia and Indonesia were particularly high. China faces total tariffs above 50 per cent — they could go even higher — and the administration was also clearly keen to choke any supply chain that might serve as a Chinese intermediary or alternative.

The announcement, it should be emphasised, had one very important pro-trade feature. As expected and hoped, Canada and Mexico were not hit with additional tariffs, leaving goods covered by the USMCA trade agreement (which Trump negotiated) largely unscathed for now. This means the effective tariff rate for cars made in North America will probably be less than the 25 per cent levied on cars from the rest of the world. 

This dovish aspect is outweighed by the ambiguities, though. The areas where sectoral tariffs are expected — pharmaceutics, copper, lumber — were specifically exempted from the national rates. But surely this is a delay rather than a reprieve. More importantly, the scope for negotiation is unclear. Asked about this yesterday, Treasury secretary Scott Bessent spoke like a man who had not been briefed: “It’s up to President Trump to see what he wants to do; I think the mindset might be to let things settle for a while.”

What will today bring for markets? As we write, things look ugly. Nasdaq 100 futures are down by about 4 per cent, and S&P 500 futures by nearly 3 per cent. Bitcoin, the asset that hedges nothing, fell. Gold, which hedges fear, rose. In a classic flight to safety, yields fell on Treasuries of all maturities, weakening the dollar.

But nothing that might happen in markets today — up, down, or sideways — would surprise us much. Today’s news will take time to digest. But here are some early thoughts on the implications:

• Growth: lower. This is a huge new tax, and, all else being equal, taxes drag on growth. “The negative GDP impact will be greater than the expected 0.5-1 per cent because US consumer spending and sentiment had already begun to slow down for cyclical reasons. The new shock . . . will cause a further reduction in spending, resulting in a reduction of job openings, higher lay-offs, lower income and a further reduction of spending. Recession odds have increased,” said Matt Gertken, chief geopolitical strategist at BCA Research. 

• Inflation: higher, at least in the short term. Samuel Tombs of Pantheon Macroeconomics noted that, if all these tariffs go into effect and tariffs on Canada and Mexico rise to 25 per cent it “would lift the core PCE [price index] by about 2 per cent”. Do not be reassured by the low inflation after the tariffs during the first Trump term. Economist Adam Posen notes that “these tariffs are an order of magnitude (10x) larger, much broader across countries and sectors, and much more aggressively arbitrary in manner of application”.

• Federal funds rate: too soon to tell. Slowing growth and rising prices complicates both sides of the Federal Reserve’s mandate. It hints at stagflation. The Fed was already predicting something to this effect. But yesterday’s announcement was more dramatic than the policy committee would have expected, said Claudia Sahm of New Century Advisors. Following the announcement, the futures market nudged up its estimate for the number of Fed cuts this year. Sahm thinks this might be a mistake. After years of inflation, “the Fed’s bias is towards getting inflation down. They would drag their feet on cutting,” she said. 

• Stocks: bearish. See comments about growth. 

• Treasuries: bullish. “This is a fraught environment, where investors have no [informational] advantage. In that type of environment, you have to take off risk,” said Gregory Peters of PGIM Fixed Income. “The only thing I feel pretty confident about is the rate market . . . this news brings growth expectations down,” supporting Treasuries.

• Inflation-indexed Treasuries: Bullish. “Most of the time I hate them,” said Edward Al-Hussainy of Columbia Threadneedle, “but they give you the benefit of markets taking down yields because its risk off, and you might have an inflation impulse, too. Tips [or Treasury inflation protected securities] perform best when break-even inflation is up and the real yield is falling. We might not be in that type of environment for long, but it feels like we are for now.”  

Trump has established a pattern of bold pronouncements followed by hasty retreats, and that may be the case again this time. But yesterday felt different, both because of the hype in the run-up and in the sheer number of commitments made on the day. There will be some abrupt turns in the months ahead. But there is no going back.

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