Quick thoughts on US reciprocal tariffs

The US President Donald Trump announced reciprocal tariff details on 2 April, 2025, which has introduced volatility to the financial markets. Alex Grassino, Global Chief Economist, along with the Multi-Asset Solutions Team (MAST), Macroeconomic Strategy Team, share their latest views.

Details about the reciprocal tariffs:

• Baseline of 10% minimum tariff on all countries, this will take effect 5 April, 2025, at 12:01 a.m. EDT.
• An individualised reciprocal higher tariff on the countries with which the United States has the largest trade deficits, this will take effect 9 April, 2025, at 12:01 a.m. EDT.
  • US is to tariff China at 34% and EU at 20%
  • Vietnam will be subject to a tariff rate of 46%, 36% for Thailand, 32% for Taiwan region, 26% for India, 25% for South Korea and 24% for Japan
  • Canada, Mexico avoid new global rates

High-level thoughts from Alex Grassino¹:

• A lot had been made of getting “certainty” or “peak tariffs” out of today. We’re not so sure. The 0.5x multiplier was framed as “nice,” but we suspect that we could see a familiar negotiating pattern unfold: Retaliatory tariffs get announced, Washington ratchets up its multiplier, and a détente/pause ensues.
• We’re a bit concerned that as the number of countries being tariffed expands, there could be delays in negotiations that could prolong uncertainty and hurt growth in those economies.
• The United States is heading toward effective tariff rates not seen in our lifetimes, and the short-term outcome is likely to be negative for growth and will push inflation higher.
• Against that backdrop, the US Federal Reserve will likely have to wrestle with whether it prioritizes inflation or the labor market/economic growth, and we—and the markets—suspect that growth will ultimately win the day, and we could see easier monetary policy.
  

Latest market commentary from MAST, Macroeconomic Strategy Team²:

Initial market reaction was somewhat negative, with equities seeing a decline and US Treasury bonds getting a bid. Markets often respond with knee-jerk reactions on the back of fiscal policy developments. In doing so, broad equities often correlate and trade in a similar fashion. This high correlation means that markets are treating all companies equally even though they can vary greatly fundamentally. As we experience volatility, this will likely lead to opportunities for fundamental investors that can find high-quality companies that are seeing lower valuations.

The bond market is acting as a diversifier and likely will continue to do so. As equity correlations spike, asset class diversification from stocks and bonds likely increases. The US 10-year Treasury yield started 2025 at 4.57% and is currently at 4.13% (Bloomberg, as of 2 April 2025). The bond market, for now, is pricing in three rate cuts over the course of 2025. In our view, high-quality bonds offer attractive income and can potentially benefit from further interest rate cuts.

The current US macro backdrop has been more stagflationary, but the US Federal Reserve will likely look through inflation pressures to focus on employment. If the US employment picture deteriorates, we’ll likely see more than three cuts in 2025, and Treasury yields may fall further. In our opinion, high-quality bonds offer of the best risk-adjusted returns at these levels.

We don’t use political developments as input into our asset allocation views as they tend to be unpredictable and often cause market outcomes that may not conform with logic. For example, at the start of the year, Chinese and European stocks have been the best performers amid tariff volatility: Not what you’d expect. When analyzing the broader macro backdrop as an input, we’re seeing a decelerating economic environment transitioning to more modest growth—due to the lagged impact of tighter monetary policy—and a decline (after a prior pull-through of positive economic sentiment following November’s presidential election). Inflation may rise due to tariffs, but we see housing prices moderating (a large component of the CPI calculation) and expect broader energy prices to be contained. In addition, with a more modest fiscal spending impulse, inflation will likely moderate beyond tariffs on imported goods. For now, we would look for high-quality US stocks on sale amid the volatility and high-quality intermediate bonds to provide income and diversification.