Month: March 2025

Trump Auto Tariffs, Threats on Allies Intensify Global Trade War

President Donald Trump signed a proclamation to implement a 25% tariff on auto imports and pledged harsher punishment on the EU and Canada if they join forces against the US, expanding a trade war and triggering threats of retaliation.

“What we’re going to be doing is a 25% tariff on all cars that are not made in the United States,” Trump said at the White House on Wednesday as he pushed ahead with a program seeking to bring more manufacturing jobs to the US.

Hours later, Trump suggested further tariffs would be imposed on the European Union and Canada if they worked together “to do economic harm” to the US. (…)

The auto tariffs will come into effect at 12:01 a.m. Washington time on April 3, initially targeting fully assembled vehicles. By May 3, the scope will expand to include major automobile parts like engines, transmissions, powertrain components, and electrical systems, with the potential to broaden further as necessary, according to the proclamation. (…)

Trump cast the tariffs as “permanent” and said he was not interested in negotiating any exceptions. The tariffs will be on top of levies already in place, White House Staff Secretary Will Scharf said, and the administration projects that the tariffs would result in $100 billion of new annual revenue to the US. (…)

In a fact sheet about the auto tariffs, the White House said importers whose vehicles were covered by USMCA, the trade agreement negotiated in Trump’s first term with Canada and Mexico, would be given the opportunity to certify their US and that the 25% levy will only apply to the value of their non-US content.

A White House official, discussing the tariffs on the condition of anonymity, said the administration would develop a plan to deal with parts that cross the border multiple times. (…)

Autos Drive America, which lobbies for carmakers based outside the US including Toyota and BMW AG, warned the new levies will do the opposite of what Trump wants.

“The tariffs imposed today will make it more expensive to produce and sell cars in the United States, ultimately leading to higher prices, fewer options for consumers and fewer manufacturing jobs in the US,” Jennifer Safavian, the group’s president, said in a statement. (…)

Tariffs will likely raise prices of foreign-made cars, but even US-made vehicles would see price increases if supplies and parts are hit by levies or if supply chains are cut off from manufacturing in lower-cost countries.

US car and light truck imports were valued last year at more than $240 billion. (…)

 

• Asked if there was anything carmakers could do to have the tariffs removed, Trump replied: “This is permanent, 100 per cent.”
• Almost half of vehicles sold in the US are imported and cars assembled in the US contain nearly 60 per cent foreign-sourced parts, according to Bernstein analyst Daniel Roeska.
• European manufacturers export up to 60 per cent of the vehicles they make in the US, according to Acea.
• The levies threaten to upend the European auto industry’s reliance on exports to the lucrative US market. German carmakers are most at risk as they send more vehicles to the US than to any other country, including many of their higher-margin combustion-engine models like Porsche’s 911 sports car and Mercedes’ S-Class sedan. Most German automakers operate factories in the US where they produce cars both for local buyers and export.
• The tariffs could be a devastating blow to Mexico’s economy, where 1mn people are directly employed in a sector that accounts for about 4 per cent of GDP.
• Japan sent $40bn worth of cars to the US in 2024, representing 28.3 per cent of its overall exports to the US.
• “The revenues we’re going to use to give the largest tax cut in American history,” a US official said. “Tariffs equal tax cuts.”
• The president reiterated a campaign pledge to juice auto demand, saying that he was working with House Speaker Mike Johnson to pass a policy that would allow consumers to deduct car interest payments from their income taxes for American-made cars.
• Used cars? Higher new car prices are likely to lead to higher used car prices.

Drill, Baby, Drill

From the Dallas Fed Energy survey:

• What WTI oil price does your firm need to profitably drill a new well?

For the entire sample, firms need $65 per barrel on average to profitably drill, higher than the $64-per-barrel price when this question was asked in last year’s first-quarter survey. Across regions, average breakeven prices to profitably drill range from $61 to $70 per barrel. Breakeven prices in the Permian Basin average $65 per barrel, unchanged from last year.

Large firms (with crude oil production of 10,000 barrels per day or more as of fourth quarter 2024) require a $61-per-barrel price to profitably drill, based on the average of company responses. That compared with $66 for small firms (fewer than 10,000 barrels per day).

• I have never felt more uncertainty about our business in my entire 40-plus-year career.
• Oil prices have decreased while operating costs have continued to increase. To stimulate new activity, oil prices need to be in the $75-$80 per barrel range. Natural gas take-away in the Permian Basin has not improved for any of my properties, and I am still getting paid slightly negative to barely positive prices for natural gas. Last month I was paid 29 cents per million cubic feet. I feel very negative about the short-term outlook for the oil and gas business.
• In a strange twist to the administration’s hope for more domestic oil and gas production, higher steel tariffs may result in fewer wells completed due to higher completion costs, and, in particular, the cost of oil country tubular goods. The margins are thin enough for many wells, and this will likely result in downward pressure on total wells brought online.
• The key word to describe 2025 so far is “uncertainty” and as a public company, our investors hate uncertainty. This has led to a marked increase in the implied cost of capital of our business, with public energy stocks down significantly more than oil prices over the last two months. This uncertainty is being caused by the conflicting messages coming from the new administration. There cannot be “U.S. energy dominance” and $50 per barrel oil; those two statements are contradictory. At $50-per-barrel oil, we will see U.S. oil production start to decline immediately and likely significantly (1 million barrels per day plus within a couple quarters). This is not “energy dominance.” The U.S. oil cost curve is in a different place than it was five years ago; $70 per barrel is the new $50 per barrel.
• The administration’s chaos is a disaster for the commodity markets. “Drill, baby, drill” is nothing short of a myth and populist rallying cry. Tariff policy is impossible for us to predict and doesn’t have a clear goal. We want more stability.
• The 2025 steel is already purchased; tariffs are most likely to impact 2026 investment decisions.
• The administration’s tariffs immediately increased the cost of our casing and tubing by 25 percent even though inventory costs our pipe brokers less. U.S. tubular manufacturers immediately raised their prices to reflect the anticipated tariffs on steel. The threat of $50 oil prices by the administration has caused our firm to reduce its 2025 and 2026 capital expenditures. “Drill, baby, drill” does not work with $50 per barrel oil. Rigs will get dropped, employment in the oil industry will decrease, and U.S. oil production will decline as it did during COVID-19.
• Drilling projects are increasing from outside sources. Natural gas is very positive.
• The rate of accomplishment of the administration’s policy agenda will impact prices for natural gas in a favorable way. Killing the climate change policies and instigating LNG exports, along with the increase in manufacturing and artificial intelligence demands, will increase natural gas consumption. Weather-related demand was higher this year, and that increased the draw down in natural gas storage.

Good for inflation, not so good for oilmen:

Trump Says He Could Cut China Tariffs to Secure TikTok Deal

President Donald Trump said he would consider lowering tariff rates imposed on China to secure Beijing’s support for a sale of the US operations of ByteDance Ltd.’s social video platform TikTok to an American company.

“Every point in tariffs is worth more than TikTok,” Trump told reporters Wednesday in the Oval Office. He suggested that “in order to get China” to agree to a sale, “maybe I’d give them a reduction in tariffs.” (…)

Trump, who once sought to ban TikTok himself, has become a cheerleader for the popular video-sharing app, which he credits with helping his 2024 presidential campaign bolster outreach to younger voters.

CONSUMER WATCH

• Bloomberg’s in-house consumer spending metric, compiled from data tracking upwards of 20 million shoppers, in turn suffered “a sharp pullback” during that period [February]. (ADG)
• Penny pinching is in. Consumers are slumming it en masse these days, as Dollar General CEO Todd J. Vasos relayed on Thursday’s earnings call that “trade-down” among both middle- and upper-income consumers “appears to be accelerating.” (ADG)

Cushion or Pushin’ Considerations for the Pass-through of Tariffs into Consumer Price Inflation

(…) Our models point to a 0.6 percentage point increase in the year-over-year rate of consumer price inflation based on the tariffs implemented thus far, but we think this is an upper bound. Aside from explicit absorption mechanisms, the staggered implementation of tariffs and the varied timing of firms’ responses means the effects of tariffs are likely to ripple through pricing over the next year or two rather than come all at once. Ultimately, we see core PCE inflation remaining near 2.8% this year—0.4 percentage points above our pre-tariff baseline—and subsiding only gradually through 2026 to remain above the Fed’s target. (…)

Upside Surprise in Durables Looks More Rebound than Recovery

(…) Despite the Bloomberg consensus of 59 forecasters looking for a 1% drop in orders, total orders rose 0.9% with some modest upward revisions to the previous month of data as well. This better-than-expected report can be mostly traced to aircraft orders specifically. Orders for defense aircraft popped 9.3%, and nondefense aircraft orders were down ‘only’ 5%. Separately released Boeing data suggested more downside risk from aircraft and point to strike effects still working their way through the data.

While some of the gain may signal a front-running of tariffs by businesses, we expect the strength more so reflects normal volatility and a rebound after some weak data. Consider orders for autos for instance, which bounced 4% in February after four consecutive monthly declines. The 2% gain in electrical equipment and 0.9% gain in fabricated metals orders also followed declines in January. Further, core capital goods orders (excluding defense & aircraft) fell 0.3% last month, signaling a bit of a weaker trend in underlying capital investment demand than implied by the headline growth rate. (…)

On a three-month annualized basis, core capital goods shipments are up 2.9%, which marks the fastest growth rate since 2020. (…)

Was this front loading in Nov-Jan, slumping starting in Feb?

Data: Census Bureau; Chart: Axios Visuals

From S&P Global’s flash March PMI:

Manufacturing output meanwhile fell into decline, contrasting sharply with the gains seen in the first two months of the year (February’s rise in output was the largest recorded since May 2022). Factories reported fewer instances of output having been buoyed by the front-running of tariffs, and new orders growth came close to stalling in the goods-producing sector.

AMERICAN EXCEPTIONALISM

A rather interesting chart from Bridgewater, showing that U.S. GDP growth has underperformed global GDP while U.S. profits outperformed. Bridgewater explains:

US companies need global cooperation. American corporations dominate global profits relative to the US economy’s share of global GDP, and they need the rules in the rest of the world to allow them to do that.

US companies’ global profit share is discounted to grow from here, which will be increasingly difficult in a less-globalized world, particularly given the risk that countries facing tariffs could focus their retaliation toward multinational US companies operating in their economies.

U.S. tariffs are likely to increase relative input costs for American corporations, at least for a year or two. The popularity of American brands across the world seems to be going the same way that the Trump administration is cultivating alliances and friendship.

CONSUMER WATCH

I generally don’t put much weight on consumer confidence surveys, being mainly coincident indicators and often in sync with gas prices.

The present exceptional circumstances suggest to not dismiss current expectations given slowing labor income growth and a historically low savings rate amid potentially accelerating inflation and a shaky equity market.

Source: The Conference Board and Wells Fargo Economics

Ed Yardeni sums it up nicely:

Consumers are feeling okay about the present situation, but they are losing their confidence in the future. (…) Americans are worrying that a recession is becoming more likely and that means fewer jobs. (…)

The percentage of respondents in the CCI survey expecting fewer jobs in 12 months rose to 28.5% in March from 16.2% last October. The percentage expecting the same availability of jobs fell from 65.4% to 54.8% over this same period. That magnitude of decline has coincided with the start of previous recessions. (…)

The percentage of respondents reporting that jobs are hard to get edged up to 15.7%, which is a relatively low reading. The percentage saying jobs are plentiful edged down to 33.6%, suggesting that the JOLTS job openings series remains relatively high. These are not recession readings.

(…) the percentage of respondents expecting lower stock prices in 12 months jumped from 21.7% in November of last year to 44.5% in March. That’s the sort of jump that has occurred in the past at the start of bear markets and recessions.

On the other hand, from a contrarian perspective, high levels of bearish sentiment have often signaled stock market bottoms. But those bottoms have also coincided with the implementation of the Fed Put, which isn’t likely to happen anytime soon since Fed officials have stated that they are in no rush to lower interest rates given the current resilience of the economy and the potential inflationary impact of tariffs.

Consumer Survey’s Decline Adds to Evidence of Gloom Forward expectations drop to 12-year low, Conference Board survey shows

(…) Expectations fell to an index level of 65.2, below the threshold of 80 that often signals a recession, the Conference Board said.

Meanwhile, the survey’s broader headline index fell to 92.9, down 7.2 points from a month earlier, marking the fourth straight month of declines. (…)

Another closely watched consumer survey, run by the University of Michigan, has fallen precipitously, declining by 27% over the year through mid-March. The latest figures from the Michigan survey are due on Friday.

How Tariffs Could Affect Consumer Spending

• Consumers believe that tariffs will be inflationary; this belief is particularly prominent among the high-income cohort.

• Across all income cohorts, consumers expect to cut spending. While a higher share of lower and middle income households expect to scale back spending when countered with tariff-driven inflation, higher-income households’ decision will be more crucial for the topline spending number as they have had a more significant share of the spending pie in recent years.

US consumers slow spending as inflation bites, Synchrony says

(…) “Purchase volumes have gone down across the industry as consumers across all income groups become more thoughtful about spending,” Axler told Reuters.

Synchrony, which issues credit cards in partnership with retailers and merchants, has more than 100 million consumer credit accounts. (…)

Retailers Bulk Up Inventories to Blunt Tariff Impact Companies from Costco to Williams-Sonoma say they pulled forward merchandise to get ahead of President Trump’s new tariffs

(…) The strategy is a hedge against the costs of increased tariffs, but logistics experts say it opens up retailers to the risk of getting stuck with piles of unsold goods as consumer spending slows. (…)

Costco’s inventories were up about 10% compared with the previous year in the three months ended Feb. 16, according to company filings. “We have been continuing to buy more inventory, which we think will be helpful as you think about some of the unpredictability that we’ve seen in supply chain timing and also with the potential risk around tariffs,” said Gary Millerchip, Costco’s chief financial officer, on an earnings call March 6.

Williams-Sonoma said inventory was up 6.9% for the quarter ended Feb. 2. The company said the elevated inventory level included shipments that were pulled forward from China to reduce the potential impact of increased tariffs.

Zumiez reported inventories up nearly 14% in the quarter ended Feb. 1, partly due to the company bringing in inventory early “in anticipation of the tariffs planned to go into effect late in the quarter,” said Chief Financial Officer Christopher Work on an earnings call this month.

The Logistics Managers’ Index, a monthly survey of supply-chain managers, showed inventory levels expanded in February at the fastest rate since June 2022. (…)

Target reported inventory was up about 7% year-over-year for the quarter ended Feb. 1, ahead of 1.5% growth in comparable sales, those from stores and websites operating at least 12 months. (…)

Walmart said its inventories were up about 2.8% for the quarter ended Jan. 31 as comparable sales grew 4.6%. “We did pull a little bit forward around the edges, but we’re selling through that stuff quickly,” said Chief Executive Douglas McMillon on an earnings call Feb. 20.

Also front loading?

• March Vehicle Forecast: Sales Increase to 16.6 million SAAR, Up 5.9% YoY

From WardsAuto: U.S. Light-Vehicle Sales Heading for Long-Time-High Gain in March (pay content).  Brief excerpt:

Deliveries appear to have accelerated sharply in the middle of the month, creating momentum that could cause sales to overshoot the forecast. Conversely, overall inventory is relatively lean – and could atypically decline at the end of March from February – so the acceleration could slow before the end of the month after enough stock is pulled from dealer lots.

On a seasonally adjusted annual rate basis, the Wards forecast of 16.6 million SAAR, would be up 3.8% from last month, and up 5.9% from a year ago.

Optimism Among CFOs Falls Amid Concerns about Tariffs, Uncertainty

Optimism about the economy among CFOs fell in the first quarter of 2025 amid concerns about tariffs and uncertainty, according to the latest CFO Survey.

The economic optimism index fell from 66.0 in the fourth quarter to 62.1 in the first quarter of 2025, almost erasing gains from a post-election jump in the fourth quarter. Optimism about their own firm’s financial prospects also fell, although not nearly as much.

CFOs revised downward their expectations for real GDP growth over the next four quarters to 1.9 percent from 2.2 percent in the prior survey. Moreover, the probability respondents assign to negative year-ahead economic growth rose to 14.2 percent from 8.5 percent last quarter.

About a quarter of firms reported that changes to trade policy would negatively impact their hiring and their capital spending plans in 2025. Next to tariffs and trade policy, changes in regulatory policy seemed most likely to affect hiring and capital spending plans, both positively and negatively. Only a few firms reported altering plans due to changes to immigration or corporate tax policy.

When asked whether they had taken certain actions due to the current international trade environment, almost 30 percent of firms said they planned to diversify supply chains, 20 percent moved up purchases, and there were some reports of finding new domestic or foreign suppliers.

Uncertainty?

The chart below shows individual FOMC members’ forecast of where they think interest rates will be over the coming years. The degree of disagreement on the committee is remarkable, with one FOMC member saying that in 2026, the Fed funds rate will be almost 4%, and other FOMC members saying that they think interest rates in 2026 will be just above 2.5%.

The dot plot also shows that there is debate about where the Fed funds rate will be in the long run, also with a range between 2.5% and 4%.

Perhaps most importantly, none of the FOMC members are predicting a sharp decline in the Fed funds rate to zero, telling the market that nobody on the FOMC is expecting a recession. (Apollo)

Trump May Implement Copper Import Tariffs Within Weeks

US President Donald Trump in February directed the Commerce Department to open an investigation into potential copper tariffs and submit a report within 270 days, though it’s now expected to be resolved sooner, said the people who asked not to be identified because the discussions are confidential. (…)

Trump has threatened to impose a duty of as much as a 25% on all copper imports, a move that could roil the global market for one of the world’s most ubiquitous metals, which is used in pipes and electrical cables.

Implementing copper tariffs with such haste would stand in stark contrast to the investigations that preceded steel and aluminum tariffs imposed by Trump during his first administration. They took some 10 months to complete. (…)

The large price differential between London and New York created a worldwide dash among traders and dealers to ship the red metal to America to capture a lucrative premium. Such a move has left the rest of the world, especially top consumer China, short of the metal. (…)

• Trump Says He Doesn’t Want ‘Too Many’ Exceptions in Tariff Push

(…) “I know there are some exceptions, and it’s an ongoing discussion, but not too many, not too many exceptions,” Trump said in an interview with Newsmax. “No, I don’t want to have too many exceptions.” (…)

Trump said Monday at the White House that he “may give a lot of countries breaks.” (…)

US Fiscal Strength Seen Weakening Further, Moody’s Says

(…) A sharp and sustained rise in US Treasury yields from very low levels in 2020, has resulted in diminished debt affordability, and Moody’s forecasts a rising pace of deterioration due to interest payments-to-revenue increasing to about 30% by 2035 from 9% in 2021. “At these levels, fiscal flexibility is considerably reduced,” it said.

Moody’s explained that a weakening US debt affordability profile means the country’s “extraordinary economic strength and the unique and central roles of the dollar and Treasury bond market in global finance are even more critical in supporting the sovereign’s Aaa credit profile.”

Still, Moody’s warned “the potential negative credit impact of sustained high tariffs, unfunded tax cuts and significant tail risks to the economy,” could result in the US strengths of being the key player in global finance proving less effective in countering “widening fiscal deficits and declining debt affordability.” (…)

The report said even the most optimistic scenario where the US economy experiences “sustained 3% real GDP growth, a terminal 10-year Treasury yield of 3% and significant cuts to government spending,” would only stabilize debt affordability “at weaker levels than in 2023 and remains materially weaker than for other Aaa-rated sovereigns.” (…)

Moody’s is the only one of the three main credit companies with a top rating on the US after Fitch Ratings downgraded the US government in August 2023 after another debt-ceiling battle in Congress. S&P Global Ratings stripped the US of its top score in 2011 amid that year’s debt-limit crisis.

• Moody’s expect the “federal government’s fiscal deficit will widen to about 8.5% of GDP by 2035 from around 6.3% in 2025,” due to increased interest payments and health-related entitlement costs.
• The debt burden is projected to “rise to around 130% of GDP by 2035 from nearly 100% in 2025.”
• The US debt burden was about 109% of GDP in 2024 relative to a much lower median ratio of about 43% for Aaa-rated sovereigns.”
• They expect the 10-year Treasury yield to peak at an average of around 4.4% in 2025 and gradually decline thereafter to settle at a terminal yield of 4% by 2029.
• A decline to 3% in Treasury yields is deemed, “very unlikely in the near term absent a major economic shock that results in de-risking of global financial markets.”

• Dalio Warns GOP of ‘Dire’ Debt as Lawmakers Weigh Tax Cuts

Bridgewater Associates founder Ray Dalio warned House Republicans of the dangers of rising US deficits and urged them to cut the budget deficit to just 3% of gross domestic product or risk debt service costs squeezing government spending.

Dalio’s message of austerity comes as House and Senate Republicans battle over the size of spending cuts to be paired with a giant tax cut coming later this year. The US budget deficit was 6.6% of GDP in 2024, according to the Congressional Budget Office. (…)

The House has drafted a $4.5 trillion tax cut blueprint paired with $2 trillion in spending cuts over ten years, which would add about $3 trillion to deficits over the decade. Senate Republicans want to deploy a budget gimmick to allow them to add trillions more in tax cuts without more spending cuts. (…)

After the Dalio meeting, House Budget Chairman Jodey Arrington said he’s resolved to block any Senate tax plan that lacks sufficient spending cuts, saying it would be dead on arrival in the House. But Arrington also acknowledged that the House’s own budget blueprint fails to meet Dalio’s 3% GDP target.

“This is not something you accomplish in one bill,” he said. “We need to begin exercising the spending cut muscles.” (…)