Bullish investors take back seat as US pushes ahead with tariffs
It’s hard to be bullish on stocks as the Trump administration pushes ahead with tariffs and other nations fight back in what could be the start of a tit-for-tat trade war that’s bad for economic growth.
It’s hard to be bullish on stocks while the US pushes ahead with tariffs and other nations fight back in what could be the start of a tit-for-tat trade war that’s bad for economic growth.
US stock market volatility hit a three-month high and the S&P 500 had its worst day this year after the US said new tariffs on Mexico, Canada and China would go ahead as planned on Tuesday.
With Friday’s US rebound in stocks proving short-lived, Australia’s S&P/ASX 200 index hit a two-month low of 8150.1 points. At that point it had fallen 5.4 per cent from a record high of 8615.2 in mid-February despite the start of interest rate cuts by the Reserve Bank of Australia.
Investors had come to expect last minute deals after US President Donald Trump granted Canada and Mexico a one-month delay on the 25 per cent tariffs that were due to start on February 4th.
But at the start of the week, Trump said there was “no room left” for a deal to avert the tariffs.
The US President also confirmed that an additional 10 per cent tariff would apply to China because it “has not taken adequate steps to alleviate the illicit drug crisis.”
Canada said a sweeping package of retaliatory tariffs on US imports would start alongside the US tariffs on Canada on Tuesday afternoon local time.
The first stage of Canada’s retaliation involved 25 per cent tariffs on $C30bn ($33bn) of US imports. A second round of tariffs at the same rate will be placed on $C125bn of products in three weeks.
China responded by imposing tariffs of up to 15 per cent on some US exports, including soybeans, beef and chicken. China also put 10 US firms in its “entity list”.
Donald Trump previously said he would double tariffs on any nations that retaliate to US tariffs.
It came as the Atlanta Federal Reserve revised down its “GDP Nowcast” of annualised US economic growth for the March quarter to minus 2.8 per cent from 1.5 per cent after a bigger than expected fall in the important ISM Manufacturing survey to a near speed of 50.3 points.
Details of the survey were particularly weak as new orders fell 6.5 points to 48.6, the biggest fall since March 2022, employment fell 2.7 points to 47.6 and prices paid leapt 7.5 points to 62.4, the highest since mid-2022.
“Demand eased, production stabilised, and destaffing continued as panellists’ companies experienced the first operational shock of the new administration’s tariff policy,” ISM survey chief Timothy Fiore said in a statement.
JP Morgan’s head of global equity strategy, Mislav Matejka, warned of a “broadening air-pocket in US economic activity, where more aggressive trade, immigration and fiscal consolidation policies could increase uncertainty, and ultimately affect US non-payrolls.”
“At the same time, CPI has been rather hot, which could constrain the Fed’s response,” he said.
“This in turn leads to curve flattening initially, as the Fed is seen not to respond at first to data softness. Ultimately, the activity airpocket could lead to more forceful Fed support, drive the re-steepening of the yield curve, and bullish equity market behaviour, likely in the second half of 2025, but not in the first instance. Defensives should be doing well in the interim.”
Moreover, global markets face at least another month of tariff news as the US plans to unleash so-called “reciprocal tariffs” early next month after a comprehensive review of US trade policy.
“Markets have predictably reacted badly, since this raises the risk that Trump will also follow through on his threats to impose reciprocal country-specific tariffs soon, including a proposed 25 per cent on imports from the EU, and product-specific tariffs, on not just steel and aluminum, but semiconductors, pharmaceuticals, other industrial metals and agriculture,” said Paul Ashworth, chief economist at Capital Economics.
Since the start of Trump’s second term, the total effective tariff on US imports is set to more than double from 5 per cent to 12 per cent, the highest since the late 1940s, according to Mr Ashworth.
For the US, revenues from these tariffs could reach almost $US300bn per year, or 1 per cent of GDP.
“That could be a significant hit to the US economy if those revenues are used to reduce the federal budget deficit rather than recycling them into the economy by cutting taxes or boosting federal spending,” Mr Ashworth said.
“US exporters will also lose out thanks to the stronger dollar, but retaliation by the other countries is likely to be modest, at least initially, as they seek to avoid inflaming tensions.
Since imports account for roughly 10 per cent of consumption, the 7 percentage point lift in the effective tariff rate will add around 0.7 per cent to final consumer prices, after allowing for exchange rate appreciation and a squeeze on profit margins.
“That would be enough to push personal PCE inflation back towards 3 per cent in the second half of this year and this could just be the start, with reciprocal country-specific tariffs and more product-specific tariffs planned for early April,” Mr Ashworth added.
“At the same time, however, if last month is any guide, Trump could decide to reduce or eliminate these tariffs if he sees an opportunity for a deal he likes.”
It came as China’s powerful National People’s Congress was due to start a week of meetings on Tuesday, amid expectations of major fiscal and monetary policy stimulus.
Economists were expecting the NPC to set a 5 per cent economic growth target for 2025, driven by an increase in China’s official budget deficit target to 4 per cent from 3 per cent in 2024.
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