Will markets overlook near-term data as we await impact of tariffs

European markets are reeling from yesterday’s tariff announcement from the White House, with Trump’s so-called reciprocal tariffs providing both a targeted and blanket approach that could both dampen global growth and lift inflation pressures.  Notably the tariffs and trade barriers mentioned as the basis for these measures were in fact just the ratio between the trade deficit and imports. This makes the job of negotiating down the tariffs much harder as it is a lot easier to remove your tariffs on US products than to eradicate a trade balance surplus. The question here is whether Trump is economically illiterate or simply lying when he states that these measures are the sum total of the barriers to trade implemented by each country. These measures appear to be aimed at benefitting a small subsection of US workers at the expense of everyone else, with US businesses and consumers on the list of those footing the bill even before you look at the global implications. US consumers and businesses have imported $439bn worth of Chinese goods in 2024, and the prospect of 54% of tariffs on those goods either mean we will see a sharp slump in consumer spending or US consumers will have to get used to a lower standard of living as their wages can cover less goods than before. Next week’s CPI report may be a little early to tell, but a wave of inflation could be coming to US shores, and the Fed’s willingness to overlook that temporary inflation looks like it will soon be tested.

The FTSE 250 has outperformed thanks to its relatively lowly tariffs levels implemented by the US, with the lack of a trade surplus providing the basis for the 10% implemented by the US administration. Kier Starmer looks to be targeting a diplomatic resolution that he hopes will result in a trade deal and the removal of that 10% barrier, but ultimately the relatively low tax on UK imports does actually make goods more competitive than products coming in from the EU. This helps build a narrative around potential FTSE 250 outperformance compared to mainland European indices, with the DAX understandably under pressure today.

Looking ahead, the US ISM services PMI provides one area of focus, although there is a chance that markets begin to treat any near-term data as less relevant as we await the early signals over how these tariffs will impact US consumers and businesses alike. The same can be said for tomorrow’s payrolls report, with data set to gradually shift from showing how businesses have adjusted to tariff uncertainty, to highlighting how those tariffs are ultimately impacting their investment decisions.