Earlier today, President Trump announced a pause on reciprocal
tariffs for 90 days. Our Global Head of Fixed Income Research and
Public Policy Strategy Michael Zezas looks at the fallout.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan
Stanley’s Global Head of Fixed Income Research and Public Policy
Strategy.
Today – possible outcomes of President Trump's sudden pause on
reciprocal tariffs.
It’s Wednesday, April 9th, at 10pm in New York.
We’d actually planned a different episode for release today where
my colleague Global Chief Economist Seth Carpenter and I laid out
developments in the market thus far and looked at different sets
of potential outcomes. Needless to say, all of that changed after
President Trump announced a 90-day pause on most tariffs that
were set to rise. And so, we needed to update our thinking.
It's been a truly unprecedented week for financial markets. The
volatility started on April 2, with President Trump’s
announcement that new, reciprocal tariffs would take effect on
April 9. When added to already announced tariffs, and later
adding even more tariffs in for China, it all added up to a
promise by the US to raise its average tariffs to levels not seen
in 100 years.
Understandably, equity markets sold off in a volatile fashion,
reflecting investor concerns that the US was committed to
retrenching from global trade – inviting recession and an
economic future with less potential growth. The bond market also
showed signs of considerable strain. Instead of yields
falling to reflect growth concerns, they started rising and
market liquidity weakened. The exact rationale is still hard to
pin down, but needless to say the combined equity and bond market
behavior was not a healthy situation.
Then, a reprieve. President Trump announced he would delay the
implementation of most new tariffs by 90 days to allow
negotiations to progress. And though he would keep China tariffs
at levels over 100 per cent, the announcement was enough to boost
equity markets, with S&P gaining around 9 per cent on the
day.
So, what does it all mean? We’re still sorting it out for
ourselves, but here’s some initial takeaways and questions we
think will be important to answer in the coming days.
First, there's still plenty of lingering uncertainties to deal
with, and so investors can’t put US policy risk behind them. Will
this 90 day reprieve hold? Or just delay inevitable tariff
escalation? And even if the reprieve holds, do markets still
need to price in slower economic growth and higher recession
risk? After all, US tariff levels are still considerably higher
than they were a week ago. And the experience of this market
selloff and rapid shifts in economic policy may have impacted
consumer and business confidence. In my travels this week I spent
considerable time with corporate leaders who were struggling to
figure out how to make strategic decisions amidst this
uncertainty. So we’ll need to watch measures of confidence
carefully in the coming weeks.
One signal amidst the noise is about China, specifically that the
US’ desire to improve supply chain security and reduce goods
trade deficit would make for difficult negotiation with China
and, ultimately, higher tariffs that would stay on for longer
relative to other countries. That appears to be playing out here,
albeit faster and more severely than we anticipated. So even if
tariff relief is durable for the rest of the world, the trade
relationship with China should be strained. And that will
continue to weigh on markets, where costs to rewire supply chains
around this situation could weigh on key sectors like tech
hardware and consumer goods.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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