Top of the Morning: ‘POTUS 47 Series: Latest on tariffs, the economic and market impact’
The desk believes that recent tariff announcements by the Trump administration will significantly impact market volatility and economic growth projections. As per the full note source, the administration's aggressive tariff approach aims to alter trading dynamics, following a historical low effective tariff rate of 1.5% when Trump took office in 2016. With prevailing volatility in financial markets, the focus shifts to how these tariffs will reshape both investor sentiment and portfolio management strategies moving forward.
What the desk is arguing
The desk frames this as a pivotal moment in U.S. trade policy, with tariffs expected to create ripples across multiple asset classes. Market participants are advised to brace for heightened volatility as these policy changes manifest in economic indicators and investor sentiment.
Supporting evidence from UBS suggests an increased effective tariff rate is anticipated, influencing import volumes and, consequently, the broader economy and financial markets. Past experiences from Trump's earlier term indicate that while tariffs initially may seem beneficial for domestic pricing power, they may also escalate inflationary pressures that hurt consumer spending.
Where it sits in our coverage
Currently, our consensus target for USD/EUR is set at 1.075, with a range spanning from 1.04 to 1.12. Notable firm targets include: - JPMorgan: 1.10, Mar26 - BofA: 1.04, Mar26
The desk's outlook aligns with JPMorgan, gravitating towards the upper bound of the forecast variability, which suggests an expectation of gradual strengthening in the USD as tariff transgressions unfold.
How other firms see it
JPMorgan remains aligned with a stronger USD outlook amid the tariff environment, while BofA presents a contrary view suggesting potential weakening due to inflation concerns. The anticipated continuation of aggressive tariffs may provoke responses from the Federal Reserve, impacting markets like USD/JPY closely linked to U.S. monetary policy dynamics.
01Tariff announcements anticipated to raise effective rates and induce market volatility.
02Historical comparisons suggest a mix of benefits and inflationary pressures impacting consumer spending.
03Portfolio management strategies may need reconsideration in light of potential shifts in asset valuations.
Market implications
Watch for a potential reaction of USD/EUR as tariffs roll out, especially if the effective rate approaches historical highs. An increase beyond the 1.075 target could signify renewed strength in the dollar amidst ongoing trade adjustments.
Risks to this view
The call may be invalidated if consumer inflation spikes dramatically, leading to a less favorable purchasing power and consumer confidence. Additionally, any unexpected diplomatic resolutions that diminish the need for tariffs could also reverse current market expectations.
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Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. As we're making our way through the early days of the Trump administration, there is much to keep track of across many fronts, both here in the U.S. and abroad.
The UBS Chief Investment Office has put together the POTUS 47 Hub at ubs.com forward slash POTUS 47, which catalogs developments out of the administration along with the market impacts and investment implications. Going forward each month here on Top of the Morning, contributors to the POTUS 47 Hub will be featured in order to keep you current on policy developments that are moving markets. So with that, for today's conversation, I am joined here by Kurt Ryman, head of Fixed Income Americas.
Kurt will provide his thoughts on Wednesday's tariff announcements by President Trump, what it all means for the markets, the economy, and your portfolio. Kurt, very timely that you're joining us today. Thank you for dropping by Top of the Morning and for spending some time with our listeners and our clients.
Good morning, Dan. Thanks very much for having me on the show. It's good to be with you.
So Kurt, as a starting point, the Trump administration, of course, has been very outspoken about the use of tariffs. Now before we discuss the latest developments, what we heard from President Trump on Wednesday, can you help us understand this tariff approach by the White House, what the administration is aiming to gain? Yeah, maybe a compare and contrast to what we saw in Trump 1.0 versus today.
You know, folks like to refer to the effective tariff rates, this is how much do we collect in revenue at the border divided by the amount of imports we bring in. And when Trump took office in 2016, and then after passing the tax cuts focused the attention on the tariffs, we saw the effective rate go from 1.5%, so very low, historically very, very low. That's kind of what we understand it to be given the orthodoxy around free trade when he took office.
But he changed that, applied tariffs primarily on China, that was the main focus. The effective tariff rate went to 3% by 2020, so from 1.5% to 3%. There's a doubling, but from a very low level.
When he took office this time, we were collecting about $78 billion in customs duties on $3.2 trillion in imports. So we were at about a 2.5% effective rate. And just with the announcements up until yesterday, we estimate that that brought us to about 9%.
You know, we would have been if nothing changed, and I think that's something we should think about in the back of our mind, if nothing changes is not a very good assumption. When you start raising tariffs, you end up impacting imports and the economy in the process. So it's not a one for one, but we would have been collecting a couple hundred billion in revenue just off of those before yesterday's announcement.
The announcement yesterday, and estimates are quite wide on this, but in a kind of maximally treating these reciprocal tariffs, which is a baseline 10% for many countries, but for those where the US has some clear grievances, you know, the country is running a surplus or country has a higher tariff rate or some combination of non-tariff barriers, then they have a higher reciprocal rate than the 10%. If you add it all up, and you don't account for any of the exclusions, you end up with an effective tariff rate that's now 25%, give or take, I mean, it's in the mid 20s, maybe the low to mid 20s. But you know, pharmaceuticals, you back those out, that's important for an exporter like the European Union.
Semiconductor is very important for Taiwan and Malaysia as a share of their exports is very high. And you saw in the executive order yesterday that the key product categories, those that had already been tariffed, like cars and steel and aluminum, and other products like pharmaceuticals or semiconductors, that brings the effective tariff rate down. But I would just caution and say, let's not get ahead of ourselves.
These exclusions are there, most likely because the administration wants to open up investigations on these product categories in the future, and it may be soon. It'll take a few months to run through the investigations, but we shouldn't be thinking about these exclusions as being permanent exemptions. It's just maybe waiting until another day.
So just to wrap it up, Dan, you know, you had asked, what does the administration want? The administration wants revenue, number one. And, you know, raising revenue in this way, with 25% effective tariff rates, is going to destroy a lot of that potential revenue raise because of the hit that the economy will take and the hit that the import activity will take if these are in place for any length of time, you know, beyond a couple, a month or a couple months.
You know, there's kind of a maximum, a revenue maximizing point, and they moved beyond that yesterday. The administration also, though, wants to limit China's overproduction and overcapacity of metals and cars and other products. The administration wants other countries to do more in global defense, so raise their defense spending as a share of their own GDP.
They want countries to reduce their tariff rates, and the U.S. has offered to reduce ours in exchange, and the non-tariff barriers as well, but those are going to be hard to achieve. So I guess, you know, there are off-ramps, there are things that can be delivered. I think it's going to be different by region, by country.
Well, Kurt, thank you very much for that overview. Now that we have that context, can you dive a bit deeper in terms of what we heard yesterday accounting for the products, sectors, countries impacted? Yeah, I mean, a 10% across-the-board tariff is, you know, it's affecting everything.
There are those carve-outs that I mentioned before, and the U.S. treated Mexico and Canada quite favorably. That is one important takeaway, that the, you know, the idea that there will be a rewrite of the U.S.-Mexico-Canada agreement at some point in 2026, and this more favorable treatment yesterday, you know, with the carve-outs for USMCA-compliant goods, and, you know, potentially goods that entered the country under most favored nation status before, they didn't enter under USMCA because they were, you know, tariff-free in many cases. So companies will just have to do the paperwork now.
But the, you know, the North American trading block really got the lightest touch yesterday. The focus was most heavy on Asia, that's clear. That's where the tariff, reciprocal tariff rates were highest.
You know, you're talking about potentially as much as now a mid-50s tariff rate on China when you add up the 10% that we had coming into this administration, the 20% additional tariffs that were applied because of Fentanyl and, well, Fentanyl. And then the, you know, 34% that was added just yesterday. There are quite a number of carve-outs, though, which, why is it, you know, why is it not 64?
Well, it's because there's carve-outs for products, you know, important in the case of China might be the, you know, the pharmaceuticals category, for example, and there are others. So the focus was on China, less of a focus on Canada. The EU also got a, you know, a sort of a reprieve with pharma, the largest category of exports to the U.S., over $100 billion of exports out of $600 billion.
Those have been exempted. But, you know, the question here is, is that a stay of execution, and is this something that's going to come down the road in a Section 232 or other type of tariff? So yeah, regionally, heaviest in Asia, next would be Europe, and then North America is kind of treated like its own fortress.
So Kurt, just looking at the markets, we have seen global markets come under pressure following the announcement. How should investors be thinking about this in terms of the overall economic and market impact? Okay.
Well, I think we should be thinking about how long these tariffs are going to be in place. The Mexico-Canada tariffs were in place for less than 24 hours before the auto sector was exempted, and 48 hours before, you know, most of the goods across the border into the U.S. from Mexico and Canada were exempted. So there seems to be some willingness to negotiate and dial these back.
And the off-ramps could be domestic, they could be international. So, you know, domestic, I would chalk it up to, you know, judicial, congressional, and political. And the way that these tariffs were imposed under the International Economic Emergency Powers Act, the same legislative standing that the ones directed towards fentanyl and immigration were targeted, so that same approach is now being applied as a universal baseline tariff, 10% plus reciprocal tariffs with some card outs.
That's on shaky legal footing. And it's not just through potentially an overextension of the administration's authority, but also when we think about what's called the major questions doctrine, which is a, you know, a ruling by the Supreme Court, that whenever something is so big that it's going to affect the economy in such a major way, then perhaps Congress needs to be a bit more specific about what the administration is going to do. So we could get an injunction.
You know, politically, or congressionally, I should say, or legislatively, yesterday the Senate passed a resolution, it's not going to go anywhere, but it voted to end the tariffs on Canada, in thinking that that's not necessarily a national emergency, maybe. And so four Republicans joined forces with Democrats, it is not going to advance, but it just goes to show that, you know, Democrats are forcing Republicans to vote in favor of tariffs. So that probably has an egg timer on it, with the economic damage that comes through and the political cost.
And then, you know, the third domestic is, this is slower, but it's the president's disapproval or approval ratings, and how does that fluctuate? So I went through a couple of the off-ramps internationally before around, you know, cutting tariffs or preventing overproduction of goods from China and other places where there's just too much capacity entering global markets, you know, cutting that off, being able to reshore to the U.S., you know, manufacturing capabilities, countries committing to defense spending, all of these are off-ramps. And so, yes, today's reaction is going to be, in a way, an assumption that these tariffs are in place for quite an extended period of time.
They may be rolled back, and they may be rolled back aggressively and, you know, reasonably soon, either through negotiation or through legal means. So we have to be open to that when we think about the range of potential outcomes, which, you know, admittedly is quite wide. Now, in terms of what to do and what not to do with respect to positioning, how should investors be managing volatility, just given the response we've seen in the markets to these developments?
Yeah, so, you know, one of the ways that I would think about this is to focus on some of the messages and focus that we've had from CIO about managing volatility. We've been talking about tariffs for a while and the risk of these. Admittedly, the tariffs that were announced were quite a bit higher than expectations, but the strategies to employ, you know, options and volatility to dampen the moves in risky assets, focusing on income within fixed income, not going too far out necessarily the curve on duration, but having, you know, a sizable exposure to, you know, sort of safer, higher quality bond, investment grade corporates even, is something that we've been talking about with investors for a while.
Gold is a precious metal, it's done very well. That allocation has been something that we've favored and have been talking about. And so these are some of the strategies also, you know, diversifying across regions is another to be thinking about within equities.
And you know, we're going to be watching currencies in a range trade for a while, there's just a lot to digest, not just the U.S. impact, but what's going to happen on the other side, you know, whether we're going to get, you know, retaliation or diplomacy, that's going to vary by country and region. But it does appear to be something of a, you know, a longer term trend towards a weaker dollar. So those are some of the, you know, the thoughts and of course, you know, we are working through our forecasts and we will bring to you our latest advice just as soon as that's available.
Well, Kurt, the conversation will of course continue, though. Thank you again for dropping by Top of the Morning today to keep our listeners, our clients current. Thank you again for joining us today, Kurt.
Thanks, Dan. Good to be with you. Thank you for tuning in.
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