Bassanese Bites: Reciprocal tariffs – February 10 2025
Global markets
Global equities softened further last week reflecting lingering concerns over US tariffs and inflation.
Global equities enjoyed a modest relief rally early last week as US President Trump delayed his proposed 25% tariff on Mexican and Canadian imports – following promises by both countries that they would do more to stop the illegal flow of drugs and people across their borders. China was not spared, and announced its own retaliatory measures.
The market relief was short-lived, however, with the latest Trump thought bubble coming on Friday, with news the US would instead impose “reciprocal tariffs” – namely tariffs on trading partners in line with the tariffs they imposed on US imports. On Sunday, Trump announced new 25% tariffs on all steel and aluminium imports.
One lingering question is the purposes of tariffs – in the trade war 1.0 they were seen as temporary measures to force various concessions from other countries. But under trade war 2.0 Trump has at times talked in terms of using tariffs to permanently raise revenue to help fund tax cuts. Which is it? Only time will tell, but if they are permanent they lose their negotiating value and risk a sustained increase in US inflation and retaliation from other countries. We’ll see – but I suspect Trump’s utopian vision of huge protective tariffs and low income taxes will crash on the rocks of reality soon enough.
In other news, Friday’s US January payrolls report was mixed – with weaker-than-expected employment growth (+143k vs +170k market expectation), yet a lower-than-expected unemployment rate (4.0% vs 4.1%) and higher-than-expected growth in wages (+0.5% vs +0.3%). Also noted by Wall Street on Friday was a drop in US consumer confidence and spike in household inflation expectations – likely reflecting concerns over the potential price impact of tariff increases. Along with Trump’s reciprocal tariffs announcement, all this was enough to send the S&P 500 down 1% on Friday.
Outside the US, European inflation was a touch stronger than expected in January, due mainly to higher energy prices. New Zealand unemployment lifted to 5.1% in Q4, a bleak result though in line with market expectations.
Global week ahead
Apart from likely further Trump noise, a key focus for global markets this week will be the US CPI January inflation report on Thursday (US time). Core prices are expected to rise 0.3%, after a benign 0.2% in December, which would keep annual core inflation steady at 3.2%.
