CONSUMER WATCH
Americans believe inflation will surge in the months ahead as tariffs take effect. The good news: Consumers see those rapid price increases as fleeting — not a permanent shock to the economy.
Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals
Note that “the widely followed proxy for inflation in the 10-year TIPS market remains highly correlated with the price of a barrel of Brent crude oil, and both have been falling lately. Go figure. We are thinking that inflation might not rise as much as feared in coming months.” (Ed Yardeni)
Yes, inflation might not rise as much as feared in coming months with the big drop in oil prices and slowing wages keeping services inflation low enough to offset rising goods prices.
Hassett ‘100% Not’ Expecting a US Recession This Year
White House National Economic Council Director Kevin Hassett dismissed the idea of a recession looming this year, countering some Wall Street forecasts of an economic downturn resulting from the steep tariff hikes being imposed by President Donald Trump.
Asked on Fox Business Monday whether he’s expecting a recession this year, Hassett responded, “100% not — 100% not.” He pointed to “very strong jobs numbers,” after data earlier this month showed an acceleration in payroll gains.
“Everything’s through the roof, anecdotally, with the CEOs I’ve been talking to,” Hassett said. “When I talk anecdotally to the CEOs, I say things like, ‘Well geez is the uncertainty over tariffs looking like it’s going to be a big drag?’ — and they’re saying things like, ‘No, in terms of production, we’re getting as much onshore as we can.’” (…)
Some people Mr. Hassett does not seem to talk to:
- “Most CEOs I talk to say we are probably in a recession right now. A couple of airline CEOs told me, and one CEO specifically said, ‘The airline industry is like a proverbial burden, a canary in a coal mine.’ I was told that the canary is sick already… I do believe we’re probably starting, if not already in, a recession.” – BlackRock ($BLK ) CEO Larry Fink
- “I think with a 90-day pause on tariffs and then probably a fairly long tail on full emergence of a clear picture… I think as every day goes by, let’s call it, this trade has negative carry to be able to hold.” – Bank of New York Mellon ($BK ) Vice Chair Robin Vince
- “A couple of importers just yesterday, and they’ve chosen to suspend imports for a while… I know this won’t work for everyone, but it might be good just to hit the pause button if you can do it.” – Expeditors International of Washington ($EXPD ) Senior Advisor Customs Ted Henderson
- “There’s a couple of large POs we’d like to place because of lead times, but we’re just kind of maybe holding off… So, I think a lot of people are just kind of a wait and see for a while in terms of placing any large orders.” – Richardson Electronics ($RELL ) General Manager Greg Peloquin
- The tariff increases should pose costs of 90% to 95% for Five Below, said Oppenheimer analyst Brian Nagel.
- Amazon Inc. is among a number of retailers — big and small — that have begun canceling orders from China and other parts of Asia. Global container bookings made between April 1 and 8 dropped 49% from the seven-day period immediately before, according to estimates from Vizion Inc., a tech company that gathers supply chain data.
Boom-bust underway:
During the period of the semiconductor shortages in 2021 and 2022, global vehicle production plunged, and as a consequence in the US, 6-10 million fewer new-vehicles were sold over the two-year period than might have been sold otherwise, and these 6-10 million missing vehicles are now not flowing into the used vehicle market.
In addition, leasing activity in 2021 and 2022 plunged, which has led to a sharp decline in the number of leases that are now maturing, and so supply of off-lease vehicles has plunged. And amid very solid demand and relatively tight inventory, retail prices started to rise again last September. (Wolfstreet.com)
Trump Floats Temporary Reprieve for Autos as Parts Tariffs Loom
President Donald Trump said he is exploring possible temporary exemptions to his tariffs on imported vehicles and parts to give auto companies more time to set up US manufacturing.
“I’m looking at something to help car companies with it,” Trump told reporters Monday in the Oval Office. “They’re switching to parts that were made in Canada, Mexico and other places, and they need a little bit of time, because they’re going to make them here.” (…)
Company representatives have told the administration that broad parts duties would drive up costs and trigger profit warnings and layoffs that would counter Trump’s goal of rebuilding US auto manufacturing. Carmakers are expected to shoulder much of the tariff burden, at least initially, with margins at many parts manufacturers already running thin.
Tariffs could add as much as $20,000 to the cost of some imported luxury vehicles, according to a report this month from research firm Anderson Economic Group. Even at the low end of the market, small sedans and crossovers with high US content could incur $2,500 to $4,500 in additional costs.
The group’s report estimated US consumer impact at $30 billion for the first full year. That would have a substantial impact on affordability, with buyers already facing average new-car prices approaching $50,000. (…)
“Look, I’m a very flexible person, I don’t change my mind, but I’m flexible, and you have to be. You just can’t have a wall, and you’ll only go, you know, sometimes you have to go around it under it or above it.” Trump told reporters.
“I helped Tim Cook recently and that whole business,” the president continued, referring to the Apple chief executive officer. “I don’t want to hurt anybody. But the end result is we’re going to get to the position of greatness for our country.” (…)
Made-in-China Toy Billionaire Says Tariffs Will Double US Prices
Toy billionaire Nick Mowbray said President Donald Trump’s tariffs have “paralyzed” his company and left it with little choice but to pump up retail prices in the US. (…)
“At the tariff levels right now, in toys at least, those retail prices need to nearly double,” Mowbray said in a telephone interview from Los Angeles. “We are in the same bucket as most of our competitors, given 80% of toys are made in China. Trump is probably going to steal Christmas from families and kids across the US.” (…)
Zuru is negotiating with retailers, many of whom have paused orders, Mowbray said.
“We’re reviewing our retail prices every day. They have to go up significantly,” he said. “We have to review how much of the tariff we are willing to absorb ourselves.” (…)
Mowbray said moving the company’s manufacturing to the US is not an option.
When it comes to toy-making, China has “a deep, deep ecosystem and the supply chain is very tight,” he said. “It’s very difficult even to go to places like Vietnam or India because the supply chain just doesn’t exist in the same way as it does in China.” (…)
“We’ve spent 22 years building this, and one or two people can upset it so much,” Mowbray said. “It’s a little bit hard to comprehend.”
CHINA
Goldman Sachs in China:
Our [Chinese] speakers concurred on the increasing importance of maintaining strong relationships with other trading partners, particularly the EU, given the anticipated significant decline in exports to the US. However, the Chinese government’s ability to strengthen these relationships remains uncertain. Substantive efforts would be required to encourage the EU to enhance trade ties with China.
These efforts could involve reducing tariff and non-tariff barriers, increasing Chinese imports from the EU, and promoting investment and technology transfer to the EU. Furthermore, the Chinese government would need to ensure that the surplus supply resulting from decreased exports to the US is not significantly redirected into the EU market.
Short-term measures should target middle-class households, whose consumption growth has decelerated the most in recent years, with stabilization of the stock and property markets as a key solution. Long-term measures should focus on low-income households, with a strengthening of the social safety net as the primary remedy.
Given the abrupt increase in US tariffs and a weakening economy, our speakers anticipate that policymakers may prioritize short-term consumption-boosting measures. Furthermore, our speakers believe that there is less potential for growth in goods consumption in China compared to services consumption. Considering the ongoing government-subsidized consumer goods trade-in program targeting goods consumption, new policies may target services consumption.
More targeted programs, such as childbirth subsidies, are probable.
Higher tariffs and declining exports could lead to renewed downward pressure on the property market in the coming months.
At China’s Wholesale Hub, U.S. Orders Have Suddenly Halted. One Example: Socks. Chinese sellers remain confident despite higher tariffs, saying it no longer makes sense to sell everyday goods to Americans
At the world’s biggest wholesale market in this eastern Chinese exporting hub, American clients have disappeared.
The Americans, or their representatives, used to show up to buy everything from Paw Patrol plushy dolls to Panama hats to toy sniper rifles. The famous Yiwu market here has 75,000 vendors across an area bigger than 1,000 American football fields; no other place sells so much stuff, so cheaply, and for decades, much of it went to the voracious U.S. consumer. (…)
Yet during a visit by a Wall Street Journal reporter, vendors said they were confident they would survive, sustained by sales to other buyers, and a bit perplexed. Where would the Americans get all their sparkly keychains, baseball caps and coffee thermoses now?
For some everyday items, such as socks, they said it might not be easy.
“They could get things from other countries, but I don’t know if the other countries can produce them as well as China,” said Zhou Li of socks maker Shen Li, referring to the U.S. “China’s ability to make stuff is just seriously incredible.” (…)
One subdistrict of Zhuji produces some 25 billion pairs of socks a year, or about a third of global socks production, state media Xinhua said.
In 2023, China accounted for 56% of American imports of socks and stockings, data from the International Trade Center’s Trade Map showed.
Socks are a low-margin item, however. Lowering their prices to offset the 145% American tariffs—which are paid by the importers—wouldn’t be feasible for sock makers, the manufacturers said. That means importers will need to cut into their profits, ask Americans to pay a lot more, or figure out some other country from which to buy low-cost socks to keep their feet warm and comfortable. (…)
Other countries, especially Pakistan, Honduras and El Salvador, also make lots of socks, and can likely pick up some of the slack if orders no longer come from China in large volumes.
But China’s prices and speed, backed by an army of skilled workers, are hard to beat. American consumers might have to pay more to buy from other countries, and could face capacity constraints if they suddenly shift orders for millions of socks to other places. (…)
- China’s Port Cargos Start to Slow as Tariff Tensions Escalate The cargo handled by ports across China over the April 7-13 period tumbled 9.7% from the week before
That’s sharply weaker than the 0.88% loss registered during the previous week, when Trump first announced his plan for reciprocal tariffs.
Container throughput dropped 6.1%, reversing a 1.9% rise a week earlier, according to data from the transport ministry Tuesday.
The numbers mark a stark reversal from the steady increase in weekly port volumes since the end of the week-long Lunar New Year holidays starting late January. (…)
For the week ended April 11, the Ningbo Container Freight Index reported an 18.0% week-over-week slide in freight rates to the U.S. west coast and a 10.8% decline in the cost of shipping to the east coast, according to data provider Wind.
In contrast, the cost of freight to Europe increased 1.8% over the same period, with rates to western and eastern Mediterranean rising 15.3% and 13.0%, respectively. Freight costs via South American east routes soared 52.5%. (…)
Trump’s Trade War Deepens Threat to U.S. Brands in China Tariff fight arrives as Chinese consumers are turning to domestic goods
(…) From smartphones to fast food, major American brands are rapidly losing market share in China to domestic rivals. (…)
Many of America’s most popular brands around the world—Nike, Starbucks, Tom Cruise—have run into competition in China from newer companies trying to beat them at their own game, eroding years of American dominance and soft power.
In March, Nike said its quarterly sales in China had dropped 17% from the previous year. That month, domestic Tesla sales were down 12%. BMW, Porsche, Apple, Starbucks and L’Oréal have all warned investors that the China growth that was once a quarterly refrain had turned into slumping sales. (…)
Hollywood movies are part of the service trade between the U.S. and China, a new front in the trade war. Unlike goods, the U.S. sells more services to China than the other way around. Movies are a much smaller part of that trade than other sectors, such as the billions of dollars that Chinese families spend on a U.S. college education, but few sectors match their symbolic heft.
Trump, who has frequently turned major studios such as Disney into political targets, had little sympathy for the studios eyeing an uncertain future. Asked Thursday about the restrictions on cultural imports such as American movies, Trump responded, “I’ve heard of worse things.” (…)
A window into Beijing’s calculus will come soon. Brad Pitt’s new movie, the big-budget racing drama “F1,” is scheduled to be submitted to Communist Party authorities for review this week. (…)
China Orders Boeing Jet Delivery Halt as Trade War Expands Beijing has also asked that Chinese carriers halt any purchases of aircraft-related equipment and parts from US companies
Ed Yardeni:
When Trump was asked whether he would use military force against a blockade of Taiwan, he responded, “I wouldn’t have to, because he [Chinese President Xi Jinping] respects me and he knows I’m f— crazy.” Trump also said, “I would say: If you go into Taiwan, I’m sorry to do this, I’m going to tax you”—meaning impose tariffs—”at 150% to 200%.” Trump suggested that he might even shut down trade between the US and China altogether.
Trump has already played his card by imposing a 145% tariff on China. The Chinese retaliated with a 125% tariff and now export controls on rare earths to the US.
The Chinese economy is much more vulnerable than is the US economy to a trade war between the two superpowers. President Xi might conclude that now is a good time to invade Taiwan since Trump has played his tariff card and Xi needs a diversion from the calamity about to befall his economy. Geopolitical risks are rising.
I disagree with Ed on the respective vulnerabilities. Today’s FT explains:
China had a trade surplus of almost $300bn with the US last year, with about 15 per cent of its total exports heading into the US. Trump’s tariffs of 145 per cent would inflict significant pain on Beijing.
But international economists said this overlooks one crucial fact: China can replace its imports from the US more easily than the other way around. US goods exports to China are heavily focused on agriculture — such as soyabeans, cotton, beef and poultry — and so are low value-added. Many US imports from China — electronics, machinery and some processed minerals — are the opposite.
German Economic Sentiment Collapses on Trump’s Tariff Chaos The ZEW Indicator of Economic Sentiment has posted its steepest decline since Russia’s full-scale invasion of Ukraine in 2022
The ZEW Indicator of Economic Sentiment, a gauge that tracks the expectations of analysts at 168 banks, insurance companies and other businesses, dived 65.6 points on month to minus 14.0 in April. (…)
“The erratic changes in the U.S. trade policy are weighing heavily on expectations in Germany,” ZEW President Achim Wambach said.
“It is not only the consequences the announced reciprocal tariffs may have on global trade, but also the dynamics of their changes, that have massively increased global uncertainty,” he added.
Goldman’s revised, revised, revised outlook:
Following President Trump’s April 9 announcement that the supplementary portion of the April 2 “reciprocal” tariffs will be paused for 90 days, we reversed the US recession call we had published less than two hours earlier. Implementation of this tariff would have pushed the 2025 effective tariff rate increase to a likely recessionary 20pp+.
Delaying (and perhaps ultimately rescinding) the supplementary tariff should limit the increase to a number closer to the 15pp we had expected before April 2, even considering the prospect of additional tariffs on pharmaceuticals, semiconductors, and other “critical goods.” We estimate that a 15pp increase in the tariff rate will cause US GDP growth to fall from 2.5% in 2024 to 0.5% in 2025, both on a Q4/Q4 basis, but will not quite trigger a recession.
However, the outlook remains fluid, particularly with respect to the China tariffs. Will the exemptions (or rate reductions) for telecoms and semiconductor equipment remain in place? Will Chinese firms be able to reroute their exports to the US via other Asian countries such as Vietnam?
And is there any hope for an agreement that brings broad tariff rates back to levels which allow for at least a moderate amount of mutually beneficial trade outside of favored products and sectors? In part because of these uncertainties and in part because it is unclear how the US economy will cope with the dramatic increase in uncertainty, we still peg the probability of a full-blown recession over the next 12 months at 45% and view the bar for returning to a recession baseline as low.
One key economic question is the resilience of the US labor market. So far, there are few signs of deterioration. The March employment report was solid, initial jobless claims remain low, and few private-sector firms have reported large-scale layoffs. A bigger uncertainty is gross hiring, which is harder to observe in real time but typically accounts for more of the ups and downs of net job growth.
In an environment marked by extreme business uncertainty, hiring is likely to decline further from its already depressed pre-tariff level—the only real question is how much. Our forecast assumes a moderate decline that pushes the unemployment rate from 4.2% now to 4.7% at yearend, but the risks are tilted to a sharper drop in hiring and a bigger increase in joblessness.
In the Euro area, we now expect real GDP in 2025 to grow just 0.3% on a Q4/Q4 basis. While the revision is smaller than in the US, the interest rate implications are more clearly dovish because tariffs are unlikely to affect European inflation much—in fact, we cut our core HICP forecast further to 1.8% in late 2026 because of the weaker growth picture and likely trade diversion from China. We now expect the ECB to keep cutting sequentially until the deposit rate reaches 1.5% (vs. 1.75% before).
We have also cut our growth and inflation forecasts in the UK and now see Bank Rate falling to 2.75% in 2026 (vs. 3% before), though our best guess is that the pace of cuts will remain quarterly.
We estimate that the direct and indirect effects of the latest tariff escalation will shave 1.7pp from China’s growth pace. However, we expect a sharp turn to easier macro policies—including an increase in the augmented fiscal deficit to a whopping 14.5% of GDP—to offset 1.2pp of this hit and have therefore downgraded our annual average growth forecasts by “only” 0.5pp, to 4% in 2025 and 3½% in 2026. The aggressive easing moves show that the Chinese leadership is preparing for a protracted economic confrontation in which it wants to be less dependent on US demand.
Our FX strategists have turned very negative on the US dollar, especially versus the yen, euro, and Swiss franc. One reason is simply valuation. Even after the depreciation of the past two months, the Fed’s real broad trade-weighted dollar index remains 20% (or two standard deviations) stronger than its long-term average. Perhaps more
importantly, the turn toward protectionism has weakened the case for US growth outperformance not only in the short term but also in the longer term. Our FX strategists note that such a creeping deterioration in relative US economic performance may have a larger negative impact than a full-blown recession, which can set off a flight to safety and boost dollar valuations along the lines of the well-known “dollar smile.”
While equity markets appear to be discounting an economic scenario similar to our baseline forecast and the still-high level of implied volatility could set the stage for further near-term price gains, our equity and cross-asset strategists remain cautious because current pricing does not offer much risk premium relative to our 45% recession probability.
- If it might seem as though we’re spending too much time on prognosticating where the tariff conflict will go, there’s a reason. Earnings for the rest of this year, and the multiples to place on them, are critically affected by how far the tariff walls are set. Until that’s resolved, nobody much pretends to have a clue as to the stock market’s direction. There’s not much to do beyond try to work it out. (John Authers)
Investors Haven’t Been This Bearish in 30 Years, BofA Poll Shows
Investor sentiment regarding economic prospects is the most negative in three decades, yet fund managers’ pessimism isn’t fully reflected in their asset allocation which could mean more losses for US stocks, a Bank of America Corp. survey shows.
Fund managers are extremely gloomy, with 82% of respondents to BofA’s monthly survey expecting the global economy to weaken. Consequently, a record number intend to reduce exposure to US equities, according to the poll.
Fund mangers are “max bearish on macro, not quite max bearish on the market,” strategists led by Michael Hartnett wrote in a note. “Peak fear” is not yet reflected in cash allocations, which currently stands at 4.8% of assets and would typically need to rise to 6%, they added. (…)
Respondents are a net 36% underweight US stocks in April, down from 17% overweight in February, the biggest ever two-month drop. (…)
Source: Bank of AmericaSource: Bank of America
Source: Baker, Bloom & Davis and Wells Fargo Economics
Top Federal Reserve official says US could require rate cuts if big tariffs return Governor Christopher Waller warns that should Trump resume steep duties growth will ‘slow to a crawl’
The Federal Reserve may need to cut interest rates sharply to prop up the US economy if Donald Trump follows through on his threat to resume big “reciprocal” tariffs, a top official at the central bank has warned. Christopher Waller, a Federal Reserve governor, said on Monday that if the US president reimposes the levies unveiled on April 2, then the US central bank would be forced to quickly make a series of “bad news” rate cuts. (…)
Waller said that if Trump applies big reciprocal tariffs after the pause, US economic growth would “slow to a crawl”, while the unemployment rate would rise “significantly” from 4.2 per cent to 5 per cent next year. (…)
“While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy,” said Waller on Monday. “If the slowdown is significant and even threatens a recession, then I would expect to favour cutting the . . . policy rate sooner, and to a greater extent than I had previously thought.” (…)
Other FOMC members have stuck by a “wait and see” approach to lowering borrowing costs, saying that they would need to see evidence in the hard data of a slowdown before responding. (…)
(…) The Atlanta Fed chief anticipates economic growth upwards of 1% this year, but he said there’s a lot of uncertainty around that outlook. He described the economy as being in a “big pause position.” Bostic pointed to businesses holding off on investments and consumers delaying big purchases.
“There’s enough uncertainty moving forward about the stability and the robustness of growth that most business leaders are not eager to just sort of get out ahead of things and hire,” Bostic said. “Whether that will persist is, I think, one of the big questions that we’re all going to have to be watching for and tracking moving forward.”
Time to hear from Scott Bessent:
Treasury Secretary Scott Bessent on Tariffs, Bonds and the Next Fed Chair
Canadian investors holding U.S.-listed securities could see a sudden spike in the amount of tax they owe under a recent U.S. bill that has been tabled as a retaliatory measure against what it calls “discriminatory taxes” of foreign countries, including Canada’s digital services tax.
If passed, the proposed legislation would add 5 percentage points to the withholding tax rate each year for four years on certain types of U.S. income for anyone living in a country that imposes a tax that the U.S. considers discriminatory or extraterritorial for U.S. citizens or corporations. The additional 20-per-cent withholding tax would remain in place as long as the other country’s disputed tax is in effect.
The proposed bill appears to be targeting jurisdictions that have implemented a digital services tax on large U.S. technology companies or have an undertaxed payments rule (UTPR). Canada’s DST was enacted in 2024.
The proposal means that Canadians who own U.S. securities that pay dividends or interest, or have realized gains, could see a large tax increase, said Kris Rossignoli, a cross-border tax and financial planner with Cardinal Point Wealth in New York. (…)
Typically, non-U.S. residents are subject to a 30-per-cent withholding tax on U.S. dividends. Currently, under the Canada-U.S. tax treaty, Canadians receive a reduced tax rate of 15 per cent. (…)
But under the proposed draft legislation – known as H.R. 591 – Canadian investors could be now be denied the reduction and required to pay the higher 30-per-cent rate. Investors would also be subject to the additional 20-percentage-point rate hike, bringing their withholding tax rate to 50 per cent.
In addition, the Canada-U.S. tax treaty currently provides an exemption from withholding tax earned within certain registered retirement accounts, such as a registered retirement savings plan. However, the proposed bill could override the current tax treaty, and expose retirement accounts to an immediate 35-per-cent withholding tax, including the first annual 5-percentage-point hike.
Karl Dennis, KPMG’s national leader for the U.S. corporate tax team in Canada, said it is still early days in the legislative process for the proposed tax bill, and Canadian investors should not make any drastic changes to their investment portfolio as a result.
In the U.S., there are dozens of legislative proposals put forward by members of Congress, he said, and few of them make it into tax law.
However, a number of Republicans have voiced support for the revised tax changes – a “step towards becoming more real,” he added.
President Donald Trump has been targeting taxes in more than 120 countries that he argues discriminate against American companies. One of his biggest complaints is the digital services tax that Canada enacted last year, which requires tech giants such as Amazon, Google, and Facebook to pay a 3-per-cent levy on revenue they generate from Canadian users. (A number of other countries such as Britain, Spain, Italy and France have imposed a DST for years without any retaliation from the U.S.) (…)
KMPG’s Mr. Dennis said it is unclear how the current draft bill would be passed as it is currently “not very articulately worded” and has some “internal inconsistencies” in it.
“It will need more work before it can be put up to vote,” he said.
Trump again blames Ukraine for starting war with Russia
(…) “Listen, when you start a war, you gotta know you can win a war,” Trump said. “You don’t start a war against somebody that’s 20 times your size and then hope that people give you some missiles.” (…)
While Ukraine has agreed to Trump’s offer, Putin has taken a hard line and shown no signs of stepping back from his maximalist demands for ending his three-year invasion of the country. The Russian admission of the missile strike on Sumy also appeared to contradict Trump’s claims on Sunday evening that Russia had “made a mistake” in the attack. (…)