US: Damage already done from the Mexico tariff threat? – ABN AMRO

According to Bill Diviney, senior economist at ABN AMRO, market sentiment has been buoyed by the deal struck between the US and Mexico to control migrant flows, thereby avoiding the imposition of tariffs threatened by the US at the end of May.

Key Quotes

“While a positive development, the news has done little to change our conviction in there being a significant growth slowdown over the coming year – and in turn, that the Fed will cut rates. A precedent has been set whereby, with very little lead-time, the US can impose trade tariffs to extract concessions on a non-trade matter.”

“Such a policy environment makes it extremely challenging for businesses to plan and to make investment decisions that depend on stable trading arrangements. Even before the latest Mexico threat, the raising of tariff rates on Chinese imports and the threat of a further escalation was weighing on the growth outlook.”

“By raising uncertainty and causing firms to delay or cancel investment plans, the threat of tariffs has likely played a significant role in the global manufacturing sector weakness that is – with a lag – now hitting the US.”

“While the direct effect of additional tariffs is likely to remain small, we expect the latest ratcheting up in tensions to further weigh on business confidence and in turn real activity over the coming months. As a result, we expect US economic growth to fall to 1.5% next year, well below growth in 2018 (2.9%) and projected growth in 2019 (2.2%).”

“Given the weaker outlook and a still-subdued inflationary backdrop, we expect the Fed to deliver three rate cuts by Q1 2020, starting with a 25bp cut in July.”