Tariff man strikes again
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Article Type
Insights
Topics
Politics, Macro
Published
April 04, 2025
Read time
5 mins
Authors
Frank Rybinski, CFA
Aegon Asset Management
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Look, up in the sky…it’s a bird, it’s a plane. No, it’s Tariff-man!

 

Much like the 1775 “shot heard round the world” that kicked off the Revolutionary War, Wednesday’s Rose Garden pronouncement was the quintessential “shot” that officially started a global trade war. In macroeconomic terms, the global economy is about to be hit with a massive negative exogenous shock (that is worse than expected) as the US looks to rip up its own script and reorder the global trading system.

 

The announcement would seem to have Adam Smith and David Ricardo rolling in their graves—the former is the father of the economic concept of absolute advantage, while the latter expanded on that concept to derive at comparative advantage (two key concepts in explaining the benefits of trade). We say that because the math utilized to calculate the trade barriers faced by the U.S. has everything to do with absolute trade deficit numbers and nothing to do with consumer preferences, production specialization, etc. (i.e., the primary characteristics that drive trade in the absence of any restrictions). This is the root of our concern: If “fairness” is defined solely as perfectly balanced trade, then this adjustment could be very painful.

 

Two key parameters to understanding the full economic impact are 1) what is actually implemented and 2) the degree of permanence. While we’ve had many oil shocks throughout history, they tend to revert relatively quickly when free markets are allowed to operate—i.e., there’s not much permanence. But if “fairness”’ as defined by balanced trade is the main driver here, then to us it implies a relatively high degree of permanence.  

 

Yes, negotiations might lead to some tinkering of the exact address, but the zip code is unlikely to change.

 

So, what does that mean for the economy?  It’s too early to be confident in point forecasts, but at a broader level the actions imply:

 

  • Sizable boost to inflation data: While much of this will be a mirage (i.e., not demand driven) it will erode real purchasing power nonetheless.
  • Ding to purchasing power: Deflating the nominal labor income proxy by a higher inflation index means less “real” dollars to fuel consumer spending. The labor income proxy itself could also experience declines if layoffs accelerate.
  • Lower consumer surplus: In economic terms, this is the difference between what a consumer actually pays and what they are willing to pay for a good. The expansion of global trade increased the aggregate consumer surplus tremendously—that now goes in reverse.
  • Margin pressure: Do companies eat part of the higher costs? What does the substitution effect look like for inputs? Longer-term supply chain management and build vs. buy?  Overall, margin compression will push corporate earnings lower and drive a negative labor response. The Job Openings and Labor Turnover Survey (JOLTS) layoff rate has been at trough levels for some time. This may finally push companies into firing mode and has the potential to amplify the contractionary impulse.
  • Lower near-term GDP growth (and a much higher recession probability) as new equilibrium is established: Less consumer purchasing power means less aggregate consumption (assuming no massive levering up of the consumer to maintain behavioral patterns), combined with margin compression.
  • Capex is a wildcard: If incentivized via bonus depreciation in the tax bill, the structural investment could offset part of the cyclical consumer drag. 

 

Onus on Congress  

We’ve long been calling 2025 the year of policy transition, as both contractionary (tariffs) and stimulative (tax cuts, de-regulation) policies were going to be enacted and that the ultimate total combination would determine the marginal growth trajectory of the coming years.

 

Furthermore, the sequencing of these policy changes can be immensely important and here’s where Congress enters the picture. The onus is on a stimulative tax cut package to be passed sooner than later (ideally before the August recess) in order to counterbalance a portion of the negative impact from the tariff action. The clock is ticking…

 

Rates reaction

It’s likely way too early to determine how the Federal Open Market Committee will react to the tariff announcement, as they’ll also be waiting for any retaliation (and re-retaliation)  to assess the degree of permanence. If forced to choose between stamping out inflation and supporting growth, we think the Fed is likely to prove accommodative, as actual demand-driven inflation is likely to be driven lower by lower consumption and growth.

 

However, it’s possible that their reaction function is slowed somewhat by the policy uncertainty and the noise in the data. Given that the market has already priced nearly 90 basis points of rate cuts in 2025, there are risks to the Fed delivering less than that.

 

We continue to like owning duration in the belly of the yield curve. Long-end rates— especially at the 30-year point—have rallied much less than the rest of the curve as of this writing.

 

While there are other factors at play and the fiscal package holds far more influence over the long end of the curve, we note that forward inflation is little changed. If the risks to growth are not counterbalanced by a stimulative tax cut package, then there is definitely room for long-end rates to join the rally.

Important disclosures

Authors

Frank Rybinski, CFA
Head of Macro Strategy
Frank Rybinski, CFA, is head of macro strategy responsible for guiding the firm’s global macroeconomic view as it pertains to tactical and strategic asset allocation.
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Aegon Asset Management
We are active global investors. In a complex world we think and act across traditional boundaries. We organize our teams globally by asset class, to bring the breadth and depth of our investment and research capabilities together for clients across the world. 
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