Cracks are appearing in US 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.

There are fears the US economy could tip into recession on its self-inflicted trade war. Picture: AFP

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 the biggest free-flowing pool of capital.

That 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. Australian shares opened Tuesday 1.3 per cent lower and are tracking at a seven-month low, futures are pointing to falls in Tokyo and Hong Kong.

Wall Street had initially taken Trump’s tariffs threats in its stride on the widespread belief that Trump’s bark is worse than his bite. Now there’s panic. They’ve misread the situation, and running for the safety of cash and bonds. Trump continues to threaten tariffs against neighbours Mexico and Canada, which the US relies on for trade, and in parts, energy. He put them in place last week but has suspended them on most goods. Tariffs on China, initially at 10 per cent and then hikes to 20 per cent, remain in place. Trump has his sights set on the EU – a two-way trade relationship worth almost $US1 trillion annually. Steel, aluminium and agriculture tariffs are next.

Investors are worried about the impact of US tariffs. Picture: Getty Images/AFP

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.

Citi’s New York-based global economist, Nathan Sheets, on Tuesday cautioned upside risks to inflation are “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.

Overnight, 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”.

US President Donald Trump has vowed to push ahead with tariffs on Canada and Mexico. Picture: AFP

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 to on the ground activity.

The comments are likely to have an impact on James Hardie, a rival building materials’ player with a much bigger exposure to the US.

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.