Daily Points

ON DECK FOR THURSDAY, APRIL 3

KEY POINTS:

• Markets have spoken. Trump’s tariffs are damaging.
• The US effective tariff rate will rise to a 100+ year high
• If they stick, then tariffs will toss the US economy into recession…
• ...and here’s why
• Watch for the Fed reaction today and tomorrow
• Watch for retaliatory guidance including from Canada
• US layoffs soar mostly on DOGE cuts, but are unlikely to hit payrolls just yet
• US fiscal deficits will be bigger than both chambers are assuming…
• ...and tax cuts in a possible recession would be more likely to be hoarded
• US ISM-services to be faded

Tariffs are good for growth, Trump says. They’ll bring home untold bounties from abroad where America has been getting ripped off, Trump says. Markets would appear to disagree with Mr. Trump. So do we as recession lurks. Markets are bailing on the US. Now watch for the fall out as governments, central bankers and markets more fully assess the implications and options.

See this note by my colleagues and I that was sent out last night on the tariff announcements and effects.

MARKETS HAVE VOTED—THIS IS OBVIOUSLY BAD FOR US AND WORLD GROWTH

Exhibit ‘A’ to that effect would be the equity response. US equities are faring worse than anywhere else. US equity futures are down by 3½–4½%+. With these moves, the S&P will be about 3% lower than the day before the US election, thus wiping out more than the post-election rally until early February and with more downside. European cash markets are down by roughly 1½–3%. Asian equities were hit hardest in Tokyo where they fell by about 3%, while everywhere else across Asia the declines were substantially more modest; HK fell 1 ½%, all other exchanges declined by less.

Exhibit ‘B’ to that effect is the dollar. It’s being ditched as a safe haven. Every major currency cross is up against it. Markets are losing confidence in America and that’s a dangerous development for the world financial system. CAD is appreciating by about 1% to the dollar but underperforming crosses like the yen, CHF and Euro.

Bonds don’t think it’s so good for growth either. Sovereign yields are broadly lower. US yields are volatile but are down about 9–11bps at present across the curve except for less on the long bond. They are vulnerable to Fed-speak shortly. Gilts and EGBs are richer by as much as 10bps at the front end in bunds and French bonds and 14bps toward the gilts front end.

Oil is cheaper with WTI down about $5 a barrel and Brent is off by a similar amount.

Gold was gaining overnight but is now down about $50/oz compared to just before the tariff announcements. Gold’s exemption from tariffs halts the patriation of gold flows to America and is not an indication that gold has lost its value as a safe haven amid turmoil in the financial system.

TARIFFS WILL SLAM US GROWTH

The US administration’s thesis is full of holes and it almost feels ridiculous to have to point out that protectionism is bad for the economy. No one credible outside of the White House would argue otherwise.

Our star modeller, René Lalonde, has estimated that for every five percentage point jump in the effective average tariff rate that the US imposes on imports, US growth falls by about a half percentage point with retaliation and slightly less without. Estimates of the impact of the tariff announcements on the effective tariff that will be incurred by the US on its imports vary according to assumptions. Chart 2 shows ours, thanks to John McNally’s calcs. Where there are differences across estimates from various shops partly has to do with whether goods, or goods and services are included. Either way, it is a massive increase in the average tariff rate that takes us back to the 1930 Smoot-Hawley era if not earlier (chart 1 on the front cover).

And so, if we treat the effects as linear over time, then a roughly twenty percentage point jump in the effective tariff on US imports would cut US GDP growth by +/-2% and with peak effects estimated to hit by 2026H1. Our baseline forecasts before yesterday’s announcements showed a slowdown in US growth toward the 1½% to 2%. The estimated shock from tariffs would tip that to zero growth if not a contraction.

What has me leaning toward contraction are a few points. For one, the effects may not be linear and could well be more magnified sooner. For another, the effects on complex supply chains are very difficult to assess and smacking them with a large spike in uncertainty puts us into uncharted waters by way of the macroeconomic implications.

More intuitively, why does US growth get hit?

• Consumption will suffer because the benefits of international trade that brought greater variety and lower prices is now going to reverse and perhaps violently so. Start piling on layoffs and the effects will be worse.
• US goods exports will suffer because punitive tariffs and likely retaliation will bring down world growth; the logic of improving US exports by hammering trade partners escapes most minds.
• US services exports will suffer for the same reason and perhaps also if other countries begin to take an axe to the US services surplus.
• Business investment will suffer because soaring uncertainty causes c-suites to rein in their enthusiasm toward the outlook. Trump’s thesis that investment will come home will work in anecdotes and some sectors but not in aggregate and will be highly disruptive to global supply chains.
• Shifting production around in response to this massive shock to global trade channels means incurring a lot of costs and those costs will be incurred by end consumers. The US is a higher cost production market compared to many of the countries it is hitting with tariffs and hiding producers behind a tariff wall will harm end buyers and ultimately impair domestic production.
• Fiscal deficits will widen even before US fiscal plans add to them because damaged growth will reduce revenues. House and Senate projections like the Senate’s updated estimates in chart 3 that were provided yesterday will very likely understate deficits. Under questioning will be their growth assumptions as staggering US debt will mount.

• The entire efficacy of tax cuts in a tariff-induced recession requires scepticism. They are more likely to be hoarded by consumers. They are more likely to be distributed back to shareholders through buybacks and dividends without stimulating investment and business spending.

WHAT DOES THE FED THINK?

Key may be how the FOMC reacts. We’ll start to find out when two of the members of the Board of Governors—and hence permanent voters—speak starting with Philip Jefferson (12:30pmET) and then Lisa Cook (2:30pmET). Tomorrow brings out Chair Powell, and then Governors Barr and Waller.

US jobless claims fell to 219k last week from 225k the prior week and remained low throughout March despite a massive rise in Challenger job layoffs. Layoffs climbed to 275k in March from 172k the prior month are the highest since the pandemic (chart 4). Much of that is because of the DOGE firing of federal government workers (chart 5), but other sectors have also seen more modest increases. The staggered nature of the layoffs will impact payrolls over the coming months but little is expected for March and there may be a short-term offset from hiring by state and local governments.

US ISM-services gets updated for March (10amET), but we’re talking history, on a day when Trump just took an axe to US growth.

Canadian PM Carney is expected to indicate retaliatory measures later today following a meeting with the Canada-US cabinet and first ministers.