President Trump’s recent statements on trade suggest a more nuanced approach to tariffs, using them as a negotiating tool rather than an immediate economic weapon. In an interview with Fox News, Trump mentioned the possibility of tariffs as a significant tool against China, though he expressed a preference not to use them. This approach contrasts with the aggressive rhetoric of imposing heavy tariffs discussed in the past.
The fact that tariffs are being wielded more as a negotiating ploy could alter expectations that were originally set for substantial and immediate tariffs. Analysts had been divided on Trump’s tariff policies, with one camp asserting they were merely for negotiation and the other anticipating aggressive implementation. The current indications suggest that the former perspective is more accurate.
Regarding market implications, Trump’s pressure on Federal Reserve Chairman Jerome Powell has so far caused only a moderate steepening of the yield curve. The emphasis is on pressuring for rate cuts, which could heighten concerns about long-term inflation, thus steepening the curve further and weakening the dollar. From an international standpoint, especially concerning China, there is a potential bull case.
Trump hints at nuanced tariffs
If tariffs are not as stringent as previously feared, markets that were discounted based on aggressive tariff expectations might experience a positive shift. The notion that the US may not engage in another aggressive trade war with China could reduce some of the market pessimism and enhance investor sentiment.
However, while the market could turn bullish based on these new signals, the broader sentiment remains cautious and bearish. The prospect of a trade war has had little impact on US financial markets so far, but predicted tariffs on China and other trading partners could threaten the market’s ongoing bull run. Equity markets have largely risen in the two and a half months since Election Day, with the S&P 500 up by 2.6% through Jan.
21. The consumer price index (CPI), the market’s preferred inflation measure, rose less than 2.2% from January 2017 to January 2018, even when the first tariffs were imposed. However, analysts highlight that while the initial tariff announcements did not significantly dent market performance, the real test will come with the implementation of broader tariffs.
Investors and market watchers are advised to stay informed about further developments, as increased tariffs could lead to increased costs for consumers and reduced profit margins for companies, potentially slowing down the bullish trend in equity markets.