Cracks are appearing in Donald Trump’s economy over tariff threat
If the first casualty of trade wars are markets, Donald Trump’s tariffs are a stunning form of economic self-harm.
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The first casualty of trade wars are markets, which is why Wall Street has seen the biggest hit since the Silicon Valley Bank-led crisis of two years ago.
Donald Trump’s tariffs, and the US president’s weekend admission his trade turmoil could cause a recession, is a stunning form of economic self-harm. The policies reverse decades of the US painfully but successfully opening itself up to the world and in the process creating a dynamic economy and the biggest free-flowing pool of capital. Yet the President is determined to push through.
Trump’s admission about the possibility of a recession was all that was needed to send US stocks, especially the high-octane Nasdaq index, tumbling. The benchmark S&P 500 was off 2.7 per cent overnight and is now down 8 per cent from its February peak. The tech-heavy Nasdaq was off 4 per cent. To add the message to Trump, Elon Musk’s Tesla slid 15.4 per cent.
Australian shares already tracking eight month lows, fell as much as 1.8 per cent but escaped the worst of the sell off, ending down 0.9 per cent. There were falls across Asia, although a recovery in US futures supported markets. If Trump measures his own success by the strength of the share market, the erosion of all the gains since the November win means he failing fast.
Wall Street had initially taken Trump’s tariff threats in its stride on the widespread belief that the US president’s very loud bark is worse than his bite. Now there’s panic. Traders have misread the situation, and are running for the safety of cash and bonds. Trump continues to threaten tariffs against neighbours Mexico and Canada, which the US its totally integrated for trade, and in the north eastern states rely on Canadian electricity.
Trump put tariffs in place on his neighbours last week but has since suspended them on most goods. Tariffs on China, initially at 10 per cent and then hikes to 20 per cent, remain in place. Trump now has his sights now on the EU – a two-way trade relationship worth almost $US1 trillion ($1.6 trillion) annually. Steel, aluminium and agriculture tariffs are next. There are real doubts Australia will get exceptions this time around.
The president appears unfazed by the message being sent to him by the markets and sees the bigger goal bringing more funds into the US. The other side of Trump’s platform including deregulation and promises of tax cuts are a boost for growth.
Tariffs hit growth in three ways. First, they raise prices for consumers and thereby cut real income. Tariffs tend to lead to tighter financial conditions and finally trade policy uncertainty – and there’s been plenty of that – leads business to push back both inbound and outbound investment.
Slowdown, slowdown
While markets can snap and surge at the whim, the real worry is the slow moving momentum of the US economy that moves at its own pace and cracks are already starting to appear.
Tariffs, supply disruption, fears of inflation, and even Trump’s crackdown on immigration is starting to hit labour markets. This is starting to hit business and consumer confidence. The next stop is recession.
Adding further tension Wall Street bank Goldman Sachs slashed its GDP forecasts for the year, blaming Trump’s tariffs. Goldmans is now tipping growth of 1.7 per cent through the year, from its 2.4 per cent forecast previously.
“Our trade policy assumptions have become considerably more adverse,” Goldman’s chief economist Jan Hatzius says.
Citi’s New York-based global economist, Nathan Sheets, on Tuesday cautioned upside risks to inflation were “increasingly moving front and centre”.
“For services sectors, prices face pressures from tight labour markets and still-high wage growth. Tariffs, meanwhile, could create challenges for global supply chains and goods prices,” he says. Like a few years ago, the response to this would be a round of interest rate hikes. Global inflation breakout will only add to the caution of Australia’s Reserve Bank in cutting rates further.
This week, the US’ biggest airline by value Delta issued a profit warning with its first quarter update, saying the outlook for sales was now softer than expected just a few months ago given the recent reduction in consumer and corporate confidence caused by increased macro uncertainty”.
Those cracks are being felt as far away as Australia. Earlier Tuesday, building materials player Brickworks warned of a non-cash writedown on its US manufacturing operations of $74m pre-tax. It said market conditions in North America were slowing faster than expected, with sales falling off and discounting taking place.
“In addition, uncertainty around the timing of the market recovery, factors such as labour shortages, elevated material costs, interest rate uncertainty and geopolitical volatility, has resulted in a moderation of the short to medium term outlook for sales activity,” Brickworks says. Its small scale, however it points what is happening on the ground.
Another test will be the planned initial public offering of CBA-backed Swedish buy now, pay later operator Klarna. It has been inching towards and US listing for years and with a valuation of $US15bn was reportedly looking to file documents for an April listing as early as this week. A pause to that process suggests is bankers are warning markets conditions could get worse before getting better. CBA last valued its stake in Klarna at $570m, although this is widely regarded as a highly-conservative estimate of market value.
Last week, Oaktree founder Howard Marks wrote the longer term gains in Wall Street means a shift is underway where “credit presently offers a better deal than equities”.
“Credit isn’t a giveaway today, but it offers healthy absolute returns and is fairly priced in relative terms,” Marks says.
Cashing up
The ground is shifting for Australian super funds with the big four cashing up in a big way. AusSuper, Australian Retirement Trust, Aware Super and UniSuper are collectively sitting on more than $60bn in pure cash waiting to deploy in investments. The figures are up until the end of December and don’t take on the recent market volatility. Australian Retirement Trust saw ts level of cash jump to $16bn from $4.2bn. Aware Super is now up to $9bn, UniSuper is up to $21bn For each of the funds, except Australian Super’s $14bn, the cash holdings have now hit record levels.
The stance suggests increasing level of caution drifting into the big funds as share markets hit record highs through the December quarter. The overlay of Trump’s tariffs are expected to only add to that caution through the March quarter.
Originally published as Cracks are appearing in Donald Trump’s economy over tariff threat
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