A new homeowner in Cleveland, Ohio, now facing surging interest rates and higher prices; or will it be a factory worker in Zhengzhou, western China, having their shifts cut back or gone altogether?
That’s the pain threshold that markets are trying to calculate, and most of the money is tipping Middle America blinking first as inflation comes roaring back, and the main-street economy is jolted.
However, they already got the bet hopelessly wrong going into this month that Trump was bluffing on tariffs and that he really was a friend of Wall Street.
Instead, the US President is digging in, especially over China – and Wall Street’s benchmark S&P 500 is on the cusp of a bear market.
Now Trump is threatening an extension of tariffs to other industries that had been carved out, including pharmaceuticals. This is certain to hurt the earnings of Australia’s big pharma names, from CSL to Cochlear.
What’s clear is that by driving up tariffs to an eye-watering 104 per cent on Chinese goods and keeping tariffs across the rest of Asia high, the US is headed for a bout of entrenched inflation and rising job losses – or stagflation – not seen since the oil shock of the 1970s.
Surging US 10-year bond yields during the Asian session on Wednesday were a warning sign equity market turmoil has started to spill into credit markets, which as The Australian flagged this week, represents a very dangerous development for the financial system.
China has vowed to “fight to the end” and there are signs it’s prepared to use the power of its balance sheet by undermining the US dollar and their bonds. Since Trump’s first term there’s been signs the Chinese President has been attempting to decouple his economy from the US. Still, the speed of the tariff escalation would have come as a surprise to Beijing.
Citi’s influential global economist, Nathan Sheets, warned of the “stagflation shock” for the United States, with tariffs pushing up prices and cutting back spending. He said this could result in real GDP to be between 1 per cent and 2 per cent lower this year.
For the rest of the world, tariffs represent a demand shock, pulling down global GDP by between 0.5 per cent and 1 per cent. The silver lining for the rest of us is that prices outside the US are likely to fall.
Already key commodity prices, including iron ore, oil and copper have pulled back as markets readjust to slower global growth.
A 104 per cent tariff on China will be crippling for exports there. However, by imposing equally punishing tariff rates across the rest of Asia and Europe, Trump has blocked China’s natural alternative export markets.
Countries like Vietnam, Thailand, Japan and South Korea are all manufacturer exporters and their path into the US has been significantly cut back.
Falling prices certainly give central banks around the world the capacity to slash interest rates. New Zealand was the first bank to hold a scheduled meeting since last week’s tariff announcement. It cut the cash rate by 25 basis points to 3.5 per cent. The rate cut had been expected, although the RBNZ is widely regarded as a leading indicator for Australia’s Reserve Bank.
The RBA isn’t scheduled to meet until May 20. Unless credit markets start freezing up, there’s no need to cut the cash rate earlier. This will send the wrong signal and set off a market panic around an already weakened dollar.
The meetings between Treasurer Jim Chalmers and RBA government Michele Bullock through the Council of Financial Regulators are more about the optics of an election campaign.
The RBNZ put some colour around how central banks are thinking about the trade crisis. In its analysis of tariff effects it admitted the final net inflationary impact would be difficult to gauge, and it’s guaranteed to bring down prices outside the United States as many are predicting. The increased trade protectionism, a switch in trade flows and supply chain challenges will lower the productive capacity of the global economy. All that could push up prices.
The RBNZ said that tariffs would be felt in two waves. The first would be direct price increases for countries imposing tariffs, and the dampening impact of increased economic uncertainty on global demand would occur relatively quickly.
Then the adaptation of global supply chains to increased trade barriers would take longer to work through.
The New Zealand central bank also said monetary policy alone would not be able to offset the long-term negative supply-side effects of higher barriers to international trade. This suggests central banks everywhere are now on heightened alert for stagflation.
The insight into how corporate Australia is adjusting to Trump’s tariffs is just weeks away.
The Macquarie conference is scheduled just days after the May 3 federal election. This is the platform for corporate Australia’s confession session, with most companies having ruled off their third-quarter accounts.
Companies such as Ansell, Amcor and outwear brands owner KMD are in the firing line. CSL, which generates about half of its revenue from the US, says it is monitoring the situation. Big miners BHP and Rio Tinto are highly leveraged to China and could also expect an earnings slowdown.
Until then, there’s little Australia can really do except ride the crisis out and hope that it doesn’t get dragged into the turmoil.
Retaliatory tariffs are not an option for a small economy built around open trade.
InfraBuild lifeline
Sanjeev Gupta’s under-pressure metals distributer and producer, InfraBuild, has found much-needed support from bondholders, who have agreed to release the $US250m in restricted funds, helping to boost liquidity.
The current restricted amounts, raised from bondholders in November 2023 and August
2024, would be returned to InfraBuild’s balance sheet, the Gupta-owned company said in a statement.
This would bolster its current free cash position to more than $700m.
In addition, the recent refinancing of $US150m gives InfraBuild more head room until the next tranche of bonds matures in November 2028. Ratings agency Fitch recently downgraded Infrabuild to two notches above “default”, saying there was an elevated probability of default within the next three months as pressures were mounting on InfraBuild’s balance sheet.
The company which operates an electric arc furnace, says it is working with bondholders to strengthen its governance and “ringfence” the business. This suggests it is attempting to protect the business from being drawn into the administration process of Gupta’s other main Australian operation, the now collapsed OneSteel Whyalla steelworks.
“The additional liquidity allows InfraBuild to continue investing in our business driving
sustainability-driven innovations,” InfraBuild chief executive Francisco Irazusta said.
It’s not all in the clear. The pending release of the InfraBuild accounts will show the extent of the dividend the British steel magnate was hoping for to help settle outstanding payments to creditors of his former financier, Greensill.
At the same time one bond holder, a fund backed by former Macquarie banker Ben Brazil, has sought a default decision and payment over a tranche of InfraBuild bonds. InfraBuild has sought to dismiss the claim.
eric.johnston@news.com.au
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