Weekly focus: Trade war lingers on as 90-day halt offers limited relief

It has been an extremely volatile week in global financial markets that got some relief following Donal Trump’s 90-day halt on the sweeping 20% tariffs he originally imposed on all US trading partners at ‘Liberation Day’, but at the same time the increased tensions with China caused a further increase in US Treasury yields and the EUR/USD. The 90-day halt is not absolute as countries still face a 10% duty on most exports and the 25% tariffs on cars, steel, aluminium as well as most goods from Canada and Mexico remain. Additionally, Trump boosted tariffs on China to 145% following their hike of tariffs on all US goods to 125%. Hence, the trade war is far from over and we continue to expect it to slow down global growth, but the change in Trump’s plans limits the hit especially in Europe and increases the chances of tariffs being used as a negotiation tool rather than a permanent source of income. However, even with the 10-percentage point lower universal tariff rate, the increase in tariffs on China means that the effective rate with unchanged trade volumes is higher than the original tariff scenario. We are thus still talking about a substantial tightening of fiscal policy in the US, that increases recession risks.

We expect China to continue to retaliate forcefully as they believe they have just as goods cards as the US in the trade war. Xi Jinping does not seem to be about to call Trump to make a deal, but when the tit-for-tat measures calm down, lower-level talks would likely start. China believes tariffs at 145% will harm the US economy as most trade will likely stop, making it harder and more expensive to get iPhone, laptops, etc., which would put pressure on Trump especially also from farmers that lose their biggest export market. To protect the economy, we expect China to take even stronger measures to boost domestic demand but not a devaluation.

In contrast to the political news, there has been very limited data this week. The sole highlight was the US March CPI inflation, which surprised to the downside, falling to 2.4% y/y (cons: 2.5% y/y) from 2.8% y/y. Energy prices contributed negatively, while food inflation accelerated. On the core side, inflation declined to 2.8% y/y (cons: 3.0% y/y) from 3.1% y/y due to lower services inflation. Data was collected ahead of the tariff announcements and core goods inflation actually declining on a monthly basis. Hence, inflation was on a positive trend for the Fed ahead of Trump’s tariff announcement that are expected to raise prices significantly in the coming year.

In the coming two weeks the main focus will be on the ECB and PBoC rate decision, the April PMI report, and US retail sales. We expect the ECB to cut the policy rates by 25bp on 17 April, bringing the deposit rate to 2.25% in line with market pricing. We expect the statement to repeat “monetary policy is becoming meaningfully less restrictive" and Lagarde to highlight downside risks to growth while abstaining from giving any clear guidance on future rate decisions. China might lower the policy rate in the week after Easter to stimulate the economy amid tariff increases. The PMI report in two weeks will be very interesting amid the growth concerns from the trade uncertainty that could show up in lower new orders. Confidence and behaviour of the US consumers are key to watch to estimate the likelihood of a severe slowdown in the US economy so the retail sales data will be watched closely. Weekly Focus will be back in two weeks and Danske Bank Research wishes all readers happy holidays!

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