U.S. tariffs have had limited impact so far on inflation and
corporate earnings. Our Head of Corporate Credit Research Andrew
Sheets explains why – and when – that might change.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Head of Corporate Credit Research at
Morgan Stanley.
Today I'm going to talk about why tariffs are showing up
everywhere – but the data; and why we think this changes this
quarter.
It's Wednesday, July 16th at 2pm in London.
Investors have faced tariff headlines since at least February.
The fact that it's now mid-July and markets are still grinding
higher is driving some understandable skepticism that they're
going to have their promised impact. Indeed, we imagine that
maybe more of one of you is groaning and saying, ‘What? Another
tariff episode?’
But we do think this theme remains important for markets. And
above all, it's a factor we think is going to hit very soon. We
think it's kind of now – the third quarter – when the promised
impact of tariffs on economic data and earnings really start to
come through.
My colleague Jenna Giannelli and I discussed some of the reasons
why, on last week's episode focused on the retail sector. But
what I want to do next is give a little bit of that a broader
context.
Where I want to start is that it's really about tariff impact
picking up right about now. The inflation readings that we got
earlier this week started to show US core inflation picking up
again, driven by more tariff sensitive sectors. And while second
quarter earnings that are being reported right about now, we
think will generally be fine, and maybe even a bit better than
expected; the third quarter earnings that are going to be
generated over the next several months, we think those are more
at risk from tariff related impact. And again, this could be
especially pronounced in the consumer and retail sector.
So why have tariffs not mattered so much so far, and why would
that change very soon? The first factor is that tariff rates are
increasing rapidly. They've moved up quickly to a historically
high 9 percent as of today; even with all of the pauses and
delays. And recently announced actions by the US administration
over just the last couple of weeks could effectively double this
rate again -- from 9 percent to somewhere between 15 to 20
percent.
A second reason why this is picking up now is that tariff
collections are picking up now. US Customs collected over $26
billion in tariffs in June, which annualizes out to about 1
percent of GDP, a very large number. These collections were not
nearly as high just three months ago.
Third, tariffs have seen pauses and delayed starts, which would
delay the impact. And tariffs also exempted goods that were in
transit, which can be significant from goods coming from Europe
or Asia; again, a factor that would delay the impact. But these
delays are starting to come to fruition as those higher tariff
collections and higher tariff rates would suggest.
And finally, companies did see tariffs coming and tried to
mitigate them. They ordered a lot of inventory ahead of tariff
rates coming into effect. But by the third quarter, we think
they've sold a lot of that inventory, meaning they no longer get
the benefit. Companies ordered a lot of socks before tariffs went
into effect. But by the third quarter and those third quarter
earnings, we think they will have sold them all. And the new
socks they're ordering, well, they come with a higher cost of
goods sold.
In short, we think it's reasonable to expect that the bulk of the
impact of tariffs and economic and earnings data still lies
ahead, especially in this quarter – the third quarter of 2025. We
continue to think that it's probably in August and September
rather than June-July, where the market will care more about
these challenges as core inflation data continues to pick
up.
For credit, this leaves us with an up in quality bias, especially
as we move through that August to September period. And as Jenna
and I discussed last week, we are especially cautious on the
retail credit sector, which we think is more exposed to these
various factors converging in the third quarter.
Thank you as always for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen; and also tell a friend or colleague about us today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.