Tariff Chess Resumes

MONETARY

• In the most recent release of the Federal Reserve’s Beige Book, various observations were made regarding the current and projected state of the Economy, Labor Market, and Inflation¹
  • Regarding economic growth, the report noted that growth was positive across most districts and that optimism remained high for growth to continue in the following months – bolstered by expectations for a strong consumer¹
  • Consumer health was seen as strong, and heightened consumer sensitivity to price & quality continues to be a dominant theme¹
    • (Federal Reserve) “Economic activity rose slightly in most Districts. Three regions exhibited modest or moderate growth that offset flat or slightly declining activity in two others. Though growth in economic activity was generally small, expectations for growth rose moderately across most geographies and sectors. Business contacts expressed optimism that demand will rise in coming months. Consumer spending was generally stable. Many consumer-oriented businesses across Districts noted further increases in price sensitivity among consumers, as well as several reports of increased sensitivity to quality”¹
  • The report also noted developments further indicating that the Labor Market is in a much more balanced position now relative to a year ago, with both hiring, quitting, and wage growth levels moderating¹
    • (Federal Reserve) “Contacts indicated they expected employment to remain steady or rise slightly over the next year, but many were cautious in their optimism about any pickup in hiring activity. Wage growth softened to a modest pace across most Districts, as did expectations for wage growth in coming months. Job growth and wage growth for entry-level positions and skilled trades were an exception, rising robustly and expected to grow further through next year.”¹
  • Inflation levels continue to be constrained by a more cost-sensitive consumer, with businesses finding it increasingly difficult to pass-along higher input prices to consumers¹
  • Businesses reported some mixed pricing pressures with regards to input costs, with some rising and some falling. Firms also noted that the potential for an increase in tariffs remains a potential area of future inflation regarding input costs
    • (Federal Reserve) “Both consumer-oriented and business-oriented contacts reported greater difficulty passing costs on to customers. Input prices were said to be rising faster than selling prices for most businesses, resulting in declining profit margins. Although input prices rose generally, contacts in several Districts noted declines in certain raw materials and non-labor costs. In contrast, rising insurance prices were again reported widely as significant costs pressures for many businesses. Contacts indicated they expect the current pace of price growth to persist, but businesses in several Districts indicated tariffs pose a significant upside risk to inflation.”¹
• In a speech on Wednesday, Federal Reserve Chairman Jerome Powell offered some additional insights into the current state of the U.S. Economy, as well as addressed a number of items related to noteworthy storylines⁶
  • Powell noted that the U.S. Economy was in a stronger position than the Fed had initially anticipated in September, and that downside risks appear to be moderating. Powell also noted that the Fed could afford to be more cautious on upcoming rate cuts, a slightly hawkish surprise.⁶
    • (Powell) “The U.S. economy is in very good shape and there’s no reason for that not to continue …the downside risks appear to be less in the labor market, growth is definitely stronger than we thought, and inflation has come in a little higher,”⁶
    • (Powell) “So the good news is that we can afford to be a little more cautious as we try to find neutral”⁶
  • Regarding the Federal Reserve’s potential to react to new tariffs imposed by the Trump Administration, Chairman Powell stressed that at present time there are too many unknowns for anyone to make policy decisions based on proposals⁶
    • (Powell) “We don’t know how big they’ll be. We don’t know the timing and duration…. We can’t really start making policy on that. We have to let this play out”⁶

 

GEOPOLITICS

• The incoming Trump Administration brings tariffs back into the forefront of the economic world by proposing a multitude of new tariffs on China, Canada, and Mexico. Tariff related storylines are expected to be a recurring theme during the incoming Trump Administration’s term as a means to achieve various ends²
  • As part of the new tranches of tariff proposals, the incoming Trump Administration has proposed the idea of and additional 10% tariff on all imported goods from China²
    • At present time, exact mechanics of the proposal are not fully known²
    • President-Elect Trump cited China’s complicit nature in allowing illicit drugs such as fentanyl produced within its borders to cross into the U.S. – pushing for more cooperation in staving off the drug trade⁵
      • (Trump) “”Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America”)⁵
  • Additionally, tariffs of 25% on imported goods from Canada and Mexico have also been proposed²
    • There is some speculation as to the legality and operational feasibility of implementing additional tariffs on both Canada and Mexico, as the U.S. is currently party to the USMCA agreement – however, new tariffs could potentially override the agreement given certain conditions²
    • Similar to the China tariff proposal, exact details and mechanics of the tariffs are unknown²
    • Goldman Sachs projects that Trump’s plan to impose tariffs on imports from Mexico and Canada would generate just under $300 billion in revenue, increase the effective tariff rate by 8.6%, and subsequently raise the PCE by 0.9%⁴
    • (Trump) “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders”⁵
  • The incoming Trump Administration has also floated the idea of 100% tariffs on countries such as Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates if they were to act to undermine the U.S. Dollar’s position as the dominant currency for global markets^2,3
    • (Trump) “We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy”^2,3
  • Finally, there was a prior proposal by the incoming Trump Administration to levy a Universal Baseline Tariff on all imported goods to the U.S. of between 10-20%⁴
    • Important to note, since the initial proposal of the Universal Baseline Tariff, the incoming administration has mainly focused on a more selective tariff strategy – largely focused on China, Canada, and Mexico⁴

[See Below for Disclosures & Annotations]

 

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. Federal Reserve. “Beige Book”. December 4, 2024
2. The Wall Street Journal. “Breaking Down Trump’s Tariffs on China and the World, in Charts”. December 3, 2024
3. Associated Press. “Trump threatens 100% tariff on the BRIC bloc of nations if they act to undermine US dollar”. November 30, 2024
4. Quartz. “Investors say Trump’s universal tariff is the greatest potential risk to the U.S. economy in 2025”. December 2, 2024
5. Reuters. “Trump vows new Canada, Mexico, China tariffs that threaten global trade”. November 25, 2024
6. Reuters. “Powell says Fed can afford to be a little more cautious”. December 4, 2024