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The introduction of significant tariffs by the Trump administration has transformed what some analysts on Wall Street dubbed “Liberation Day” into “Libation Day,” as they grapple with the need to take both Donald Trump’s actions and words with seriousness. Michael Feroli of JPMorgan highlighted that these tariffs, through static calculations, are set to increase taxes by approximately $400 billion, making it the largest tax hike in terms of GDP since the Revenue Act of 1969. This move is projected to elevate inflation by 1 to 1.5 percentage points and increase the effective average tariff rate to 23 percent, the highest in a century. Feroli warns that this could potentially drive the U.S. economy towards a recession. The reduction in purchasing power could lead real disposable personal income growth to dip into negative territory in the second and third quarters, subsequently risking a contraction in real consumer spending during those periods. This potential economic impact may edge the economy dangerously close to a recession, even before considering further reductions in gross exports and investment spending. There are already reports of retaliatory measures from U.S. trading partners, and more developments are anticipated in the coming days. The current ambiguous nature of the situation and uncertainty about the duration of these tariffs create an unfriendly environment for investment spending.
Deutsche Bank’s George Saravelos provided three major observations regarding the tariffs. Firstly, the U.S. administration appears focused on penalizing countries with significant trade deficits in goods, not services, aligning with the declaration of a trade deficit national emergency that justifies the tariffs legally. Secondly, Saravelos notes a large disconnect between the recent communication about detailed policy assessments of bilateral trade relationships and the actual policy outcomes, raising concerns about the administration’s credibility and structured planning for major economic decisions. Lastly, the approach to tariff calculations seems to create a more open-ended nature to potential trade negotiations, primarily aiming to reduce bilateral trade imbalances without specific policy demands.
Saravelos points out that the Trump administration’s simplistic method of calculating the tariffs raises serious concerns about policy credibility, which undermines the dollar. The simultaneous decline in the dollar and U.S. equities is particularly troubling for a global investment community heavily reliant on U.S. assets. Analysts from Barclays express similar concerns regarding the unexpectedly high tariffs and the peculiar method of their calculation, noting that while tariffs are mostly accounted for in current market prices, the risk of these actions pushing the U.S. and Europe into recession remains underestimated.
Barclays analysts state that the new tariffs and ongoing trade policy uncertainty dampen the global economic outlook. They acknowledge the potential for negotiations, which could see tariff levels as a ceiling, with room for reduction. However, potential retaliatory actions by U.S. trading partners could exacerbate growth risks. Anticipated policy support from central banks and government could mitigate some negative impacts, but the overall growth risks are considerable. As discussed recently, the market may have priced in some tariff risks, but recession risks might be less accounted for, as evident from the reaction of equity indices. Further market downturns might prompt a policy reversal from the Trump administration.
Steven Blitz of TS Lombard concurs that the tariffs are recession-inducing but believes this overlooks broader implications. According to Blitz, the Federal Reserve is not inflating to counteract tariffs, as the intention is to create pain to encourage reshoring activities. Trump seems prepared to accept the recession risk for the potential benefits of reshoring. Blitz also argues that the changes lead investors to reprice against breaking a longstanding trade/dollar agreement, potentially leading to higher costs for holding U.S. dollar assets.
Blitz acknowledges that while Trump’s assertion about a rigged system against the U.S. may hold some truth, the trade reset could result in unfavorable outcomes. Further analysis and updates on the sell-side reactions will be reported as more information becomes available.