Month: May 2025

Note: I am travelling until mid-May. Postings will be irregular.

Trump Stages a Trade-War Retreat Markets cheer as the U.S. strikes a deal with the United Kingdom.

The WSJ Editorial Board:

President Trump continues to walk back his trade war by degrees, and markets continue to cheer. That’s the big story in Thursday’s announcement that the U.S. and the United Kingdom have struck a new trade deal.

Many details need to be worked out, but the deal marks another step back from Mr. Trump’s “liberation day” tariffs of April 2. The President and his advisers promised no exceptions at the time, but the markets staged a revolt. Mr. Trump then offered a 90-day reprieve to everyone but China to negotiate deals that pull the U.S. and the world back from the trade-war abyss. (…)

The deal as outlined Thursday looks like progress, as far as it goes. Britain is still stuck with Mr. Trump’s new 10% tariff on all imports from all countries. But it will now be spared higher industry-specific tariffs on steel (25%) and cars (27.5%). The car rate will fall to 10% for the first 100,000 vehicles Britain ships to the U.S. each year—a quota that happens to be roughly the number of sales. The U.S. tariff on British metals will fall to zero.

In exchange, Britain will lower its barriers on imports of American ethanol, and its airlines will buy Boeing jets worth $10 billion. The two sides also agreed to expand reciprocal trade in beef products.

It appears the deal won’t reduce Britain’s health-and-safety standards for American beef, which has long been U.S. ranchers’ main sticking point. Also left out is Britain’s ban on imports of American chicken that’s been disinfected in a chlorine wash, despite the lack of any health risks. Negotiations on chickens and other trouble spots such as trade in digital services and taxes on U.S. tech giants will continue, as they’ve done for some time.

But the details here matter less at the current moment than the direction of U.S. trade policy, as the buoyant market response recognizes. A month ago the world looked to be on the edge of potential 1930s-style trade meltdown.

That seems less likely now. Mr. Trump is promising many more trade deals to come, as he tries to execute a retreat from his tariff morass. And credit to Mr. Starmer for recognizing the opportunity and offering the President an exit he can boast about. Other national leaders can take that lesson.

Mr. Trump and his protectionist chorus will say this was the plan all along, as if a flight from the dollar and U.S. equities and a surge in bond yields were anticipated. The President likes tariffs for their own sake, which is why he made his April 2 announcement. But the looming economic damage has proven to be too risky to be politically sustainable. If Republicans want to pretend this retreat is genius at work, fine with us as long as the damage is reduced.

Not that this is the end of the trade harm. The U.S. still has to negotiate deals with countries that may be more resistent to avoid more tariff mayhem when the 90 days expire. The biggest question concerns China and the looming shutdown in most two-way trade.

Mr. Trump has already given exceptions to Apple and other tech companies. But that won’t fill empty retail shelves, or help small businesses that can’t get critical components. It’s no surprise that the White House was leaking on Thursday that Mr. Trump might reduce his 145% tariff on Chinese goods to 50% by next week. More good news for markets.

Mr. Trump still has a long way to go to mitigate the harm from his tariff barrage, and some of it will be permanent in the form of higher border taxes and prices. But the British deal offers a template for a partial face-saving exit, if Mr. Trump will take it.

• Trump’s Bespoke Trade Deal With U.K. Sets Little Precedent for Other Nations Many other agreements weren’t seen as likely to come together quickly

(…) In a sign of how eager Trump was for a win in the trade conflicts, he called U.K. Prime Minister Keir Starmer late Wednesday to finalize the details. Starmer was watching his favorite soccer team, Arsenal, play a crucial European game at the time, according to the prime minister, who said he hadn’t planned to announce a trade deal on Thursday.

“They are keen to show they are making progress,” said Myron Brilliant, a senior counselor at DGA Group. “These are signals to the market. It’s better to have a step forward than a step back. But they are going to have to demonstrate these deals are going to end up with sustaining commitments on both sides.” (…)

“One lesson from the U.S.-U.K. announcement is that all of America’s trading partners are likely to face at minimum a 10% tariff,” said National Foreign Trade Council President Jake Colvin. “That alone would result in a permanent fourfold increase from the average U.S. tariff of 2.4% in 2024, which is a scenario that was nearly unthinkable just a year ago.” (…)

For Chinese officials, what’s notable in the limited deal Trump struck with the U.K. is that it doesn’t appear to have any details about the two countries aligning to isolate China—a stated goal by Trump advisers for the administration’s trade negotiations with various nations. (…)

• Britain’s trade deal with Trump may not be good news for the world

The FT’s Allan Beattie:

“How much legal structure will this deal have?” a trade lawyer at a prominent firm asked me yesterday, gesturing at the detritus of a meeting on the conference table in front of him. “About the same as this napkin.”

Not even the architects of the trade deal announced between the US and the UK would call it a thing of economic or legal beauty. Seemingly without even a signed document — and designed purely to escape the tariffs that Donald Trump imposed on steel and cars — the pact is closer to a protection payment to a mob boss than a liberalising agreement between sovereign countries.

Whether the deal is politically worth it is a calculation only Sir Keir Starmer’s UK government can make. Certainly it didn’t grant US exporters a huge amount more access to the UK market. But whatever short-term benefit it has given to the UK, it hasn’t done a whole lot for the integrity of the global trading system. (…)

Meanwhile, the most important risk is not to the UK itself but the global trading system. Part of the deal involves reducing protection on imports including ethanol and beef from the US but not from other countries, despite this not being a formal legal trade agreement. The UK has thus undermined the “most favoured nation” principle that underlies the multilateral trading system.

Officials strain credibility by claiming it’s compatible with World Trade Organization rules as part of a broader package. If other countries want to kick up a fuss, a WTO dispute settlement hearing may soon be sorting that one out. By accepting that it will continue to face the 10 per cent baseline tariff, the UK has also normalised a deeply regressive move.

Goldman Sachs: (my emphasis)

President Trump announced a preliminary trade deal with the UK that leaves in place the US 10% baseline tariff but scales back sectoral tariffs on autos and steel/aluminum, and appears to lay the foundation for preferential treatment for the pharmaceutical tariffs the Trump administration is considering.

The deal appears to reduce UK tariffs on certain agricultural products (e.g., beef, ethanol) from the US, and also exempts UK aerospace parts from US tariffs. Together, these changes look like they would reduce the US effective tariff rate by less than 0.1pp.

In comments during the announcement, President Trump also took a much more conciliatory tone on the US-China talks, saying “Who made the first call, who didn’t, it doesn’t matter. It only matters what happens in that room, but I will tell you that China very much wants to make a deal.”

He also expressed optimism, saying “I think we’re going to have a good weekend with China.” We have expected the US and China to remove the retaliatory tariffs relatively soon—likely in the next few weeks—leaving a still-substantial tariff increase of 54pp and 34pp respectively.

While the UK deal and China comments both suggest tariff de-escalation, President Trump also suggested for the second time this week that he might reintroduce higher country-specific tariff rates in the near future: “there’ll be a time…where we’re just going to make the deal…we don’t need the country involvement because we’ve already had it. And we’ll say this particular country which had big surpluses…is going to pay a 25% tariff or a 30% or a 50% or 10% or whatever it may be.”

While we do not expect the “Liberation Day” tariff rates to take effect at the end of the 90-day pause, it appears increasingly likely that some if not most trading partners will soon face a renewed threat that country-specific rates will take effect, and points to a higher chance that the US might impose those rates on at least a few trading partners.

Ed Yardeni:

President Donald Trump will need to declare victories in his trade wars with multiple countries around the world sooner rather than later. He and his fellow Republicans have to avoid a recession caused by his tariff wars. Otherwise, they risk losing their thin majorities in both houses of Congress later in 2026. In addition, court cases are piling up that challenge the President’s legal authority to declare a crisis to justify his tariff hikes. In the event that the courts rule that Trump’s tariffs are unconstitutional, he still could declare that he won the trade wars and so doesn’t need tariffs anymore.

(…) negotiating trade treaties and implementing them can’t be done in 90 days. But odds are that there will be multiple trade agreements in principle by the deadline and that another postponement period will be declared for the stragglers.

The stock market will soon have deals fatigue and tire of Trump’s declarations of victory. We think the trade issue will be behind us by July or August. If so, then the focus should be on how much Trump’s tariff skirmishes weighed on the economy and earnings. We expect both will remain surprisingly resilient.

Contributing to today’s stock market rally was the latest weekly unemployment insurance claims report. It confirmed that the labor market remains resilient. It isn’t showing any cracks from Trump’s Tariff Turmoil. Initial jobless claims fell back to 228,000 during the May 2 week. (…)

It’s no surprise that nonfarm business productivity dropped by 0.8% (saar) during Q1 given that real GDP fell 0.3% during the quarter while labor hours increased. We view this as a temporary disruption related to Trump’s Tariff Turmoil, which shows signs of ebbing. We’re still betting on a Roaring 2020s scenario over the rest of the decade, with technological innovations boosting productivity and real economic growth while keeping a lid on inflation.

• Trade War Has Much Bigger Negative Impact on the US (Apollo)

The IMF just released their latest World Economic Outlook, and comparing their pre-tariff forecast from January with their forecast today shows that they expect the trade war to have a much bigger negative impact on the US economy than on other countries, including China, see chart below.

Sources: IMF, Apollo Chief Economist

BTW: Trump’s tricky numbers (Axios)

President Trump’s net job approval rating has dropped seven points since April 15, according to The Cook Political Report’s new poll tracker.

Trump has taken big hits from young voters, Latinos, and independents — three key groups that helped propel him to the White House.

“Continuing to track the president’s approval among the coalition groups that propelled him to victory in 2024 will give us a strong indication of whether those voters will show up next year to support Republicans not named Donald Trump,” CPR’s Carrie Dann writes.

The shift was -11.8 points for 18-to-29-year-olds — the biggest drop of any group.

For Latinos, Trump’s net rating dropped 10.4 points.

For independents, it was a net drop of 7.9.

Toyota Says Tariffs Will Erase $1.3 Billion in Profits in Just 2 Months The automaker’s somber forecast for the fiscal year underscored how quickly fortunes had turned for many companies reckoning with President Trump’s tariffs.

(…) Toyota’s remarks on Thursday suggested a challenging period ahead for the Japanese auto industry as a whole, particularly because most analysts consider Toyota to be among the Japanese carmakers least vulnerable to Mr. Trump’s tariffs.

Of the more than 2.3 million vehicles Toyota sells annually in the United States, only around 500,000 are exported from Japan. And despite the tariff blow to profits, the company forecast that its sales in North America would rise this fiscal year by 237,000 units.

Smaller Japanese automakers such as Mazda and Subaru sell a significantly higher proportion of imported vehicles in the United States, while Mitsubishi Motors does not have any factories in the country. Japan’s second- and third-largest automakers, Honda and Nissan, are set to announce fiscal year earnings next week. (…)

Chinese Exports to US Slump 21% But Soar to Rest of Asia, Europe

Total exports expanded 8.1% last month, above the 2% increase forecast by economists. Imports fell 0.2%, leaving a trade surplus of $96 billion, according to data from the customs administration Friday.

Shipments to the US fell 21% after the imposition of tariffs in early April, while those to the 10 Southeast Asian nations in the Asean group rose 21% and exports to the European Union were up 8%. (…)

Note: I am travelling until mid-May. Postings will be irregular.

Wall Street Is Watching This Shipping Data to Gauge Tariff Impact Ships, trucks and railroads are helping measure the economic blow from tariffs

(…) U.S. retailers and manufacturers have been stocking up on furniture, clothing, electronics and everything else that comes into the country by containership. That has caused a wave of containers to wash over the neighboring ports of Los Angeles and Long Beach, the main gateway for imports from China.

The pull-forward indicates that some U.S. businesses have enough inventory to last weeks or longer before having to refresh orders. Southern California port officials expect imports to fall steeply in May.

(…) China-to-U.S. bookings have declined 60% since April 9. (…)

And ocean carriers have been canceling sailings across the Pacific Ocean to the U.S. Almost 30% of such journeys were canceled for the week ended May 4, according to Flexport. At the Port of Los Angeles, imports are expected to fall 35% this week compared with a year ago. (…)

Net orders for heavy-duty trucks in North America tumbled to 16,500 vehicles in March, down 5.9% from the same month in 2024, with the highest order-cancellation rate in almost two years, according to ACT Research. (…)

ACT Research President Ken Vieth said dealer inventory levels in March hit a record 91,600 vehicles as truckers were “flirting with global financial-crisis profitability levels.” (…)

In the real world:

The Bubble Blasters and Other Chinese Goods That Are Paralyzed by Trade Chaos American importers cancel orders and scramble for alternatives, while Chinese factories cut staff and offload goods

(…) China is the source of 74% of the U.S.’s imported toys and games, 87% of its Christmas decorations, excluding candles, electric lighting and natural Christmas trees, and 97% of its fireworks, according to 2024 data from the International Trade Centre, an agency of the United Nations and the World Trade Organization.

Americans imported a total of $439 billion of goods from China last year, according to Census Bureau data. (…)

For Robert Bohrer, a California-based importer of drill press vises, calipers and other industrial metalworking products from China, the chaos started soon after Trump’s “Liberation Day” on April 2, when the president put his tariff campaign into overdrive. (…)

As his inventory dwindles, Bohrer is seeing shortages and price increases. While he and his partner used to import about one container a week, with around $100,000 worth of merchandise per container, he doesn’t have any shipments from China on the water now. On May 1, he finally had to send the email to his customers he had been hoping to avoid, telling them prices would be going up effective May 19. (…)

He has spent the past few weeks calling up contacts and trying to order goods from places such as India and Taiwan. But many products that he imports are exclusively available in China, or are significantly more expensive elsewhere, he said. (…)

“Everybody’s pretty much trying to move out of China ASAP,” said Jim Kennemer, who runs a sourcing company, Cosmo Sourcing, in Madison, Wis., that helps American companies find producers in Asia. (…)

But many are finding that non-Chinese factories are overwhelmed, or otherwise unable to handle their orders. (…)

Some products are best and most cheaply sourced from China, where many counties and cities specialize in particular categories—such as fireworks—and authorities have supported the development of exporters with policies and infrastructure. (…)

“In China, you have an entire ecosystem, from the factories, the suppliers of raw materials, the employees, infrastructure such as trains and ports all within that same region,” said Alex Armas, a Puerto Rico-based importer and manufacturer’s representative who sources seasonal decorations for U.S. and Latin American clients. He said he had seven containers-worth of orders canceled by U.S. buyers in a single day.

“People say, look for other places. I have been looking for other alternatives too for several years,” he said. Shifting to other countries takes time, and finding alternatives for some products is difficult.

George Balanchi knows all of that well. As a college student in the early 2000s, he helped his father develop a magnetic construction toy. On Yahoo, he found a Chinese factory that was able to produce the toys for a quarter the price that it cost to make them in the U.S. He started a company called Mindscope Products, and soon was also selling remote-control stunt cars and other toys to QVC. (…)

But once Trump’s China tariffs reached 54%, Balanchi had to freeze everything, not just with Chau, but also with other Chinese suppliers. He estimated that he has lost about $1 million worth of new business as customers such as QVC stop placing orders. He figured he’ll also likely lose much of the roughly $500,000 in deposits he has paid to his Chinese suppliers, including Chau. (…)

He said he would love to make his products elsewhere and even looked into moving production to Mexico a couple of years ago. But the quoted price was four times the cost of producing in China.

“My world, and everyone in my industry, whoever’s moving product, everyone’s world has been just halted,” Balanchi said. (…)

• The total US trade deficit reached a record $140.5 billion in March, driven by tariff frontrunning and weaker service exports. (The Daily Shot)

Source: @TheTerminal, Bloomberg Finance L.P.

• Travelers are shunning the United States

The March international trade data released this morning in the United States certainly attracted attention, if only because the deficit reached a record high of $140.5 billion in the month.

The deterioration was driven by a sharp rise in goods imports (+5.4%), which was linked to businesses bringing forward orders to avoid the imposition of tariffs.

But another element of the report caught our attention: the sharp decline in travel services exports, which include accommodations, meals, and travel agency and education fees paid by foreign visitors to the United States. As today’s Hot Chart shows, these fell by no less than 7.1% over the month, the worst decline in nearly a quarter of a century, with the exception of the months of pandemic lockdown.

Over the last three months, the decline has been a whopping 10%. These figures confirm what airline ticket sales data had already suggested in recent weeks, namely that some travelers are now shunning the United States.

We expect this new reality to have a negative impact on production and employment in tourism-related sectors, as well as on the financial results of companies that depend on foreign visitors.

• S&P 500 Exposure to China

(…) Calculations from FactSet’s Geographic Revenue Exposure Database show that China makes up about 7% of total annual revenue in S&P 500 companies. Comparing the magnitude of the trade deficit with the revenue generated by S&P 500 companies in China shows that US companies made $1.2 trillion in revenue selling to Chinese consumers—about four times more than the size of the trade deficit in goods between China and the US, see chart below.

The bottom line is that if the US has to decouple completely from China, it would result in a significant decline in earnings for S&P 500 companies no longer selling products to Chinese consumers.

• Both business optimism and capital spending expectations have plunged, marking one of the steepest two-month declines since the pandemic. (The Daily Shot)

Source: Goldman Sachs; @GunjanJS

Trump Downplays Trade Negotiations, Says He’ll Dictate Terms

US President Donald Trump said he would prescribe tariff levels and trade concessions for partners looking to avoid higher duties, appearing to move away from the idea that he would engage in back-and-forth negotiations.

“We’re going to put very fair numbers down, and we’re going to say, here’s — what this country, what we want. And congratulations, we have a deal. And they’ll either say ‘great,’ and they’ll start shopping, or they’ll say, ‘not good,’” Trump said Tuesday at the White House as he met with Canadian Prime Minister Mark Carney.

“It’s going to be a very fair number, it’ll be a low number. We’re not looking to hurt countries,” he added. (…)

Wage Growth Tracker Was 4.3 Percent in April

The Atlanta Fed’s Wage Growth Tracker held steady in April at 4.3 percent.  For people who changed jobs the tracker increased to 4.3 percent, up slightly from 4.2 percent in March.  For those not changing jobs, the Tracker held steady at 4.4 percent.

Ford Increases Prices for Certain Vehicles Amid Tariff Uncertainty Higher prices will apply to 2025 models of the Maverick, Bronco Sport and Mach-E built after May 2

(…) The carmaker said the manufacturer’s suggested retail price, which is commonly known as the sticker price, would increase between $600 and $2,000 a vehicle, depending on features, according to the memo.

Ford isn’t changing the price of any of its existing inventory or vehicles currently in transit, the memo said. (…)

Fed Warns of Rising Economic Risks as It Leaves Rates Steady Officials are puzzling over whether to focus on the risks of higher prices or weaker hiring

(…) Expectations of a rate cut at the Fed’s next meeting in mid-June declined Wednesday. Powell said officials felt like the costs of waiting to learn more about the economy were “fairly low.” He used the term “wait and see” 11 times on Wednesday.

“We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient,” he said. “And when things develop, of course, we have a record of—we can move quickly when that’s appropriate.”

Investors broadly expect the Fed to cut interest rates by the second half of the year. (…)

“It’s not a situation where we can be pre-emptive because we actually don’t know what the right response to the data will be until we see more data,” he said. (…)

Powell repeatedly described the economy as solid. But he also offered a candid assessment when he said last year’s rate cuts were “a little late.” (…)

Eurozone Shoppers Spend Less as Tariffs Weigh on Mood March’s backslide in retail consumption came amid worsening consumer confidence across Europe

Retail trade slipped by 0.1% across the 20 nations that share the euro, defying economists’ expectations for an increase that would have built on February’s growth in sales, figures from the European Union statistics agency showed Wednesday. February remains the only month in the last six in which trade has increased.

March’s backslide in retail consumption came amid worsening consumer confidence across Europe, a result of looming U.S. trade tariffs that have spread uncertainty and pessimism across households and businesses alike. President Trump at the start of April set out a sweeping package of tariffs that included a 20% duty on all EU goods. The president later paused those levies on the EU, which he claims are reciprocal, though a 10% baseline tariff remains in place, as do sector-specific import duties on cars and some metals. Eurozone consumers’ mood fell in April to its lowest point since the end of 2023, according to an EU gauge compiled following the tariff announcement.

Weakening sales at eurozone retailers come despite lower inflation and a robust jobs market that have boosted real incomes in recent months. Annual price inflation eased to 2.2% in March and held steady in April, keeping close to the European Central Bank’s 2% target.

Sales were up 1.5% YoY.

Trump plans nuclear power push

The White House is planning executive action soon to try to speed nuclear reactors’ deployment, Daniel Moore scoops in Axios Pro: Energy Policy ($). One or more orders will likely lean heavily on the Defense and Energy Departments as a way to meet soaring energy demand.

The administration views the Pentagon — with its deep pockets, massive energy demand, and ability to absorb risks in ways the private sector can’t — as a “key enabler” for nuclear.

The plans have been in the works for weeks and could drop any day, sources said.

FYI:

• The S&P 500’s recent trajectory has converged with the historical median for 10% corrections, but the path forward increasingly hinges on recession risk. Historically, markets recover sharply in the absence of a downturn, while recession-linked corrections tend to deepen and persist. (The Daily Shot)

Source: Goldman Sachs; @WallStJesus

• GS: On the Precipice

Despite some tariff relief, resilient hard data, and easier financial conditions, our 12-month US recession risk estimate remains 45%, in part because of a big weakening in the soft data.

Our baseline is three consecutive 25bp Fed cuts, now starting in July. We are dovish on the ECB and especially the BoE, and have pushed back the next BoJ hike to January.

We have softened our assumptions on China policy stimulus, in part because growth has held up better than expected under the tariff onslaught so far.