Weekly house view | Tariff zig zag
The week in review
The US and China entered a full-on trade war, imposing tariffs of over 100% on each other’s goods in a conflict that raises both the risk of a US recession and the prospect of sharply reduced Chinese growth. The erratic roll out of the tariffs has confused markets and left households worried they will be poorer.
In a see-saw week for markets, Trump announced a 90-day pause on higher-band tariffs for most countries, with the notable exception of China. He also decided to remove computers, chips and phones from the so-called “reciprocal tariffs” but later saying the tech tariff exemption would be temporary.
The aggressive US trade policy has increased downside risks, including impacts on disposable income, consumer morale and financial conditions. The S&P500[i] rose 5.7% (in USD) on the week, helped by the biggest one-day rise since Great Financial Crisis (GFC) after the 90-day pause announcement. US Treasuries initially rallied but then sold off, with the 10-year yield rising from 4.0% to 4.5%. Importantly, 30-year yield real rates reached 2.8%, the highest level since the GFC. This was driven by concerns over liquidity, market dislocation, and increased term premiums. The USD weakened by 3.2% vs the euro. The Stoxx Europe 600[ii] lost 1.8% (in euros), reflecting the negative effects of the tariffs and the stronger euro on earnings.
Quote of the week
“I thought that people were jumping a little bit out of line. They were getting yippy … a little bit afraid,” Trump said, explaining his 90-day tariff pause.
Key data
US CPI data surprised significantly to the downside, falling 0.1% month-on-month in March. Super core services declined -0.24% on the month. The University of Michigan consumer survey showed consumer expectations hit their lowest since 1980, while expectations for inflation a year from now leaped to 6.7%, the highest level since November 1981. At the five-year horizon, inflation expectations rose to their highest since 1991.