Readers of the newsletter we sent yesterday regarding President Trump’s “reciprocal” tariffs might be tempted to think “what a difference a day makes.” While we welcome the midday news of a 90-day pause of the “reciprocal” portion of the tariff (not the base 10% tariff) for those countries that have not retaliated against the United States, this announcement doesn’t change as much as it might appear.
Certainly, it is helpful to see actual evidence that the President will negotiate for lower tariffs (the administration has been giving mixed signals on that) as it was announced that various delegations are on their way to the US to meet with US negotiating teams. But Canada, The European Union and China have all retaliated against the US tariffs and thus are not part of this relief; collectively, they represent the lion’s share of the US’s trading relationships by value. We’ve seen estimates that the pause brings the increase in the average tariff rate down from about 20% to 15%, so most of the increase would occur even if all of the non-retaliating countries definitively escape any reciprocal tariff. And it remains to be seen what the outcome of negotiations will be. Following today’s announcement, Goldman Sachs reduced their recession odds in the next 12 months from 65% to 45%; essentially, a toss-up. And we still expect recessionary forces (visible in “hard” economic data on spending and employment) to gather pace given that much uncertainty (which slows spending decisions) remains. As and when that happens, calculated recession odds can be expected to rise.
With Trump having already retaliated against China’s retaliation (putting rates at about 125%) and Treasury Secretary Bessent (who briefed the White House press corps on the pause announcement) mentioning East Asian countries being at the front of the negotiation queue, it appears that the administration is attempting to focus the global tariff teams into China versus everyone else. With appropriate caveats for this speculation: To the extent the administration is successful in so arranging the contestants, that would seem to make some sort of multi-lateral agreement more likely.
The pause removes some near-term pressure on the Federal Reserve to cut interest rates. While rate cuts later this year are the market’s baseline expectation, the tariff shock challenges both inflation and growth, putting the Fed in a tough spot between its two statutory mandates: full employment and low inflation. Future significant weakness in the job market would typically mean the Fed would cut, but it will need to pay attention to whether consumers and financial markets are expecting longer-term inflation to retreat and remain low. If inflation readings and expectations of future inflation rise significantly, rate cuts to help the labor market become more doubtful. That said, we would not be surprised if the Fed buys some US Treasury bonds for their balance sheet if Treasury market liquidity (which has shown some stress) deteriorates much further. Rates were rising today, even with the good news.
With today’s announcement, stocks and corporate bonds rallied hard. After the declines experienced in the prior four trading days, many market participants were looking for a reason to “buy the dip” and markets might have trimmed their rate of descent in any case. We would expect that the pause will tend to put a cushion under asset prices for a time. Next week, companies will start reporting earnings for the quarter ended March 31. We expect companies to guide future earnings down or withdraw guidance altogether in light of continued tariff uncertainty. That process could restart pressure on asset prices. And then there’s always the possibility of further announcements by Trump that bring more concern. Consequently, days like these are reminders of why we counsel staying the course, meaning staying committed to one’s investment policy, and not trading in and out of markets unsystematically.
Thank you for your trust and attention. We welcome your questions and comments.