Macroeconomics: The Day Ahead for 2 April

US ‘reciprocal tariffs’ day has finally arrived, with an otherwise light schedule of both data and events unlikely to make much of an impression on rather febrile and tense markets. There are for the record South Korea’s CPI and India’s Manufacturing PMI to digest, while ahead lie US ADP Employment and Factory Orders. The latter follow a somewhat deceptively modest drop in yesterday’s Manufacturing ISM to 49.0. Deceptive in so far as Orders (45.2 vs. prior 48.6) and Employment (44.7 vs. 47.6) were very weak, but heavily offset by a surge in Prices Paid to 69.4 from 62.4, the worst reading since the pandemic – the attached chart speaks for itself. It’s worth adding that some are highlighting the ISM Orders vs. Inventory spread being close to a recession signal, but it’s difficult to make a call when this inventory build is for the time being ‘intentional’ rather than involuntary. Central bank speakers include ECB’s Lagarde and Schnabel and Fed’s Kugler, while Poland’s NBP is again expected to hold rates at 5.75%, with Monday’s lower than expected CPI perhaps opening the door to less hawkish messaging on the rate outlook. Govt bond supply takes the form of UK Index-Linked 10-yr and German 10-yr conventional Bund.

** U.S.A. – Tariffs announcement **

– Statements from US government officials have suggested that there will be no ‘carve outs’ or exceptions on reciprocal tariffs (for the time being, and presumably subject to negotiation going forward), though reports suggest that final decisions have not been made. It will be complicated enough to implement on a country or trading bloc basis, with exceptions only adding to the cost of implementation (just as DOGE is cutting many govt jobs), both at government and corporate level. Such a blanket imposition of tariffs has not been seen in many a decade, per se ‘model estimates’ of their impact will inevitably have a wide margin of error. The president has said the measures will be ‘kinder than other countries were to the USA over the decades’, presumably this refers to the level of these new tariffs, which will be on top of those announced for steel, aluminium and autos. ‘Kinder’ in that context is therefore ‘relative’ rather than implying lower than extant tariffs, or indeed in absolute terms. As JP Morgan Asset Management’s chief strategist David Kelly recently observed: “The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.” Be that as it may, some have suggested that the announcement will remove some uncertainty, but this looks to be optimistic, purely on the basis of the ‘back and forth’ implementation of tariffs on Canada, Mexico and Colombia. Indeed the highly disruptive issue of what will happen with the port charges on China made ships remains a potentially larger and more disruptive threat. The questions that will follow are: a) how much emphasis will there be on non-tariff specific barriers such as VAT or regulatory standards. b) How will they be challenged in the US’s constitutional courts, given that they will be imposed via use of the International Emergency Economic Powers Act (IEEPA) of 1977 (as per the measures already enacted on Canada, Mexico and Autos, the former clearly violating the terms of the USMCA), while Article 1 of the US Constitution gives the legislative branch (Congress) the power “to lay and collect Taxes, Duties, Imposts and Excises” and “to regulate commerce with foreign nations” (both the 1930’s Smoot-Hawley and 1890s McKinley tariffs were enacted by Congress). c) How will other countries or trading blocs respond, i.e. retaliate? In terms of the the latter, the initial focus will be on the EU and China. Per se it will be a landmark day in terms of what is announced, but what finally emerges in actual “terms of trade” will remain written in the stars.