In today’s briefing:
- Trump’s Reciprocal Tariffs Hit Asia Hard
- US Tariff Impact Estimates
- TRUMP’S TARIFFICATION: The Market’s Willful Ignorance
- Investors Have that “Oh Sh#t Moment” – Part 1: Hong Kong Strategy
- US Reciprocal Tariff Scheme Is Likely to Boost US Manufacturing in Time; Positive
- Asia: Look for Economies with Headroom for Policy Support
- US: Policy Volatility Generates Inflation Setbacks, but Recession Fears Overblown
- ECB Meeting Accounts – March 2025
Trump’s Reciprocal Tariffs Hit Asia Hard
- The scale and scope of Trump’s reciprocal tariffs has exceeded our expectations.
- The growth outlook has unambiguously worsened across the board and will dominate inflation in Asia this year.
- We expect Asian policy rates to be reduced by an average of 100 basis points in 2025.
US Tariff Impact Estimates
- New US tariffs ignored any notion of reciprocity, reaching shockingly substantial sizes. However, the UK was relatively fortunate in landing on the 10% minimum rate.
- Repeating 2024’s imports would raise $577bn in tariff revenue, which is worth ~3% of consumption. 70% pass-through to prices would add 2% to the level over 1-2 years.
- Negotiations need to conclude rapidly to avoid these front-loaded price rises. The EU’s likely retaliations would magnify its pain, but the US is the biggest stagflationary loser.
TRUMP’S TARIFFICATION: The Market’s Willful Ignorance
- Liberation Day marks the beginning of the Tariffication of the global trading system. The complex web of supply chains will be forced to detangle itself to find cost efficiencies.
- US companies will try to unpack the many complexities of re-sourcing products to mitigate the inflationary effects of tariffs. Domestic substitution is not a possibility in the near-term.
- US consumers will begin to see inflationary impacts of Tariffication in the coming weeks. China announced retaliatory measures that would open the door for other countries to do the same.
Investors Have that “Oh Sh#t Moment” – Part 1: Hong Kong Strategy
- That “Oh sh#t moment” has just struck many investors in US markets
- Within Hong Kong , Tech most at risk as investors take profit
- Our alternative sector selection has performed both absolutely and in relative terms
US Reciprocal Tariff Scheme Is Likely to Boost US Manufacturing in Time; Positive
- All imports into the US will face a minimum 10% tariff (with a few product exceptions). Countries face differential tariffs depending on their own effective protection against US exports.
- China exports to US (54% tariff) suffer a near-crippling blow, with Vietnam (46%), Bangladesh (37%), Indonesia & Taiwan (32%) hammered too. India, Korea, Japan, UK to benefit from trade diversion.
- There’ll be substantial re-shoring of US manufacturing over 2-10 years, boosting the US economy. Inflation will be a near-term problem, but most countries are likely to mutually negotiate tariffs down.
Asia: Look for Economies with Headroom for Policy Support
- As the trade war threatens to upend Asian economies’ export driven growth, most will have to provide monetary and fiscal stimuli to boost domestic consumption and investments.
- Studying their real policy rates, inflation trajectories, public debt to GDP and Government’s borrowing cost, we assess which economies have adequate headroom to provide monetary and fiscal stimuli.
- China, Korea and Thailand have adequate space to provide both monetary and fiscal stimulus. India can loosen monetary policy but not fiscal policy. Indonesia and Philippines are in India’s camp.
US: Policy Volatility Generates Inflation Setbacks, but Recession Fears Overblown
- Policy volatility/uncertainty has generated negative surprises in inflation, especially with core PCE rising 0.3%MoM in Jan’25 and 0.4%MoM in Feb’25, causing the YoY increase of 2.8% in Feb’25.
- M2 growth was only 4.4%YoY in Feb’25, certainly not an inflationary factor. The ‘reciprocal tariffs’ (an effective new tariff of 20% across the board) will add 0.4pp to near-term inflation.
- 10yr-2yr yield curve remains upward sloping (+0.29pp); tariffs are just 1/4th those of Smoot-Hawley, and unlike them will likely result in mutual tariff reductions. The selloff is a buying opportunity.
ECB Meeting Accounts – March 2025
- In the accounts for its March meeting, the ECB cited a broadly intact disinflation path and moderating wage pressures, but emphasised that rising trade and fiscal uncertainties diminish the reliability of the baseline outlook.
- While most inflation indicators point to a sustained return to target, sticky services inflation and tight labour markets present upside risks, necessitating a cautious approach to future rate cuts.
- With credit conditions easing and policy rates approaching estimated neutral levels, the ECB acknowledged that monetary policy is becoming less restrictive and refrained from signalling further easing.
This content is sourced through publicly available sources and has been machine generated. Information displayed is for general informational purposes only.
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