Key Takeaways
- With signs of pragmatism emerging from the White House we have seen calmer conditions in financial markets.
- President Trump tempered comments on Federal Reserve Chair Jay Powell and suggested a deal (to drop tariffs substantially) with China will be struck. Similar remarks were made on Europe.
- Trade deals take time, and the US is negotiating on multiple fronts – with such a drawn-out process the chances of significant harm being done to the global economy (and US in particular) increases.
- The situation remains fluid and hard to analyse – some US policies may prove to be transient, and outcomes will vary by country. Business and consumer confidence survey data is already being hit and there will be harm to supply chains.
- Markets have been extremely week but any positive turn in sentiment could provide momentum. For that to happen we’ll need to see concrete news on deals or de-escalation.
Financial market nerves appear to have calmed somewhat on signs of pragmatism emerging from the White House.
Federal Reserve (Fed) Chair Jay Powell said last week that President Trump’s tariffs are ’likely’ to put at risk the Fed’s goals of keeping prices and unemployment in check. Powell said the tariffs announced so far had been ‘significantly larger than anticipated’ and the ‘same was likely to be true of the economic effects, which will include higher inflation and slower growth’. Powell warned on the need to ‘keep longer term inflation expectations well anchored’ and to make certain that a one-time price increase [from tariffs] ‘does not become an ongoing inflation problem’.
Powell’s speech appeared to have upset the President, who said the end of Powell’s tenure “cannot come soon enough” and posted on social media that the Fed Chair was “always TOO LATE AND WRONG”. While Powell was appointed by Trump during his first term in office, it is clear that with inflationary risks from tariffs on the horizon, Powell, who is one of 12 members of the Fed’s interest rate setting committee, is minded to ‘wait and see’.
US markets – which were open on Monday while the rest of us enjoyed the Easter break – sold off aggressively but by Tuesday evening, President Trump’s tone had shifted. Firing the Fed Chair would be a legal minefield, but from a market’s perspective, meddling with the Fed leadership would further unsettle fragile confidence. On Tuesday evening, Trump said he had ’no intention of firing’ the Fed Chair, adding ’the press runs away with things. No, I have no intention of firing him. I would like to see him be a little more active in terms of his idea to lower interest rates’.
We’ve been hearing more positive comments on potential trade deals with both the EU and China over recent days. President Trump said that the current level of 145% tariffs on China would eventually ’drop substantially’. Treasury Secretary Scott Bessent was reported to have told a private event that the stand-off with China was ‘unsustainable’ and he expected a ‘de-escalation’. Trump’s tone on Europe was also softer and he commented that there would ‘100 per cent’ be a trade deal.
A lot needs to happen in the coming weeks given the complexities of trade deals – and progress will not be simple. Over the weekend, President Trump has spoken of ‘200 trade deals’ to be announced in the next 3-4 weeks. Initial talks between the EU and US saw the EU trade envoy Maroš Šefčovič saying he was left ‘struggling to determine what the US was aiming for’. China, meanwhile, has denied any talks are even happening. Historically, it has taken the US 18-months to negotiate a trade deal and a further 45-months to implement an agreement. Trying to negotiate with 90 countries at one time appears quite overwhelming. That means either we see some headline grabbing ‘deals’ done or this is a long-drawn-out process which increases the probability of significant harm to the global economy, and the US in particular.
We’re now seeing stories emerge of a substantial drop off in shipping volumes from China to the US. And there are container ships anchored off Los Angeles waiting to unload Chinese goods hopefully at lower tariffs. As US inventories are drawn down, there are warnings of empty shelves and higher prices ahead. Such a backdrop will likely weigh further on consumer sentiment, and in turn, Presidential approval ratings.
Trying to analyse what is a very fluid situation around tariffs, their scope and endurance is not a simple process. President Trump’s policies may well turn out to be somewhat transient in their nature for some trading partners and there are many scenarios to be modelled. These will range from full on trade war (and recession) to ‘free trade’ but still involving a US tariff rate substantially higher than we’ve seen in the past 90 years. So, there will be growth and inflation impacts in the US as well as country specific outcomes elsewhere. If we are to see a de-escalation, then the 90-day window for negotiations will still mean some harm is done to supply chains. In addition, we are seeing hits to both business and consumer confidence survey data. On top of that, the 10% global tariff is already in place, and set to persist.
Last week’s strong markets were helped by more optimism on tariffs, and a U-turn from the President on his threats to remove Jay Powell. Markets have been extremely weak so any positive turn in sentiment is likely to see market momentum improve. All the same, we are going to need to see concrete news on trade deals or de-escalation before too long because with the two main economic powers choosing not to trade with one another there will be significant economic consequences, and not just for the US and China.
