Market Brief: Markets Look Through Renewed Tariff Threats
The dollar is up modestly against its major rivals after Donald Trump verbally threatened to increase tariffs for the third weekend in a row. In a press briefing conducted on Air Force One ahead of yesterday’s Super Bowl, the president told reporters that he would unveil new reciprocal tariffs—levies designed to match foreign protectionist measures—in the coming days, and will impose 25 percent tariffs on steel and aluminum products from all US trading partners today. Reciprocal tariffs—which are designed to match protectionist measures in other countries—are generally well supported on both sides of the aisle, and are not terribly impactful for markets, given that most developed economies are already running tariff regimes that closely mirror the US.
Markets appear unconcerned. Ten-year Treasury yields are essentially unchanged relative to Friday morning, equity futures are up slightly, and most currencies are only modestly softer against the greenback. The euro and yen are trading with a weaker bias as traders brace for higher tariffs on auto exports, while the Canadian dollar and Mexican peso inch lower on the prospect of weaker steel and aluminum exports.
The shock factor is beginning to fade. In the president’s first two weeks in office, markets have had to grapple with a series of deeply-contradictory trade policy pivots: initially reacting positively when administration officials said he intended to pursue a more gradualist approach, but then snapping back when he called this “fake news”, hearing that tariffs could be embedded in oil deals, suspecting that they could be linked to TikTok sale, seeing them applied and then reversed on Colombia, bouncing back as he told Fox News that he would “rather not” impose them on China, selling off when he signed an executive order imposing significant levies on Canada and Mexico, and finally reacting with relief when he granted a 30-day reprieve after leaders in the two countries repeated previous pledges to increase border security efforts*. At this point, it’s clear that it is deeply unwise to place large bets on market outcomes contingent upon the president following through on his tariff pronouncements.
But real damage could be inflicted on Canada. Although steel and aluminum products make up a relatively small share of the country’s overall exports to the US—around 3.1 percent—and the sector employs just 30,000 people out of a total labour force of more than 20.5 million, the hit to manufactured-product prices could be substantial, and other spending spillovers could add to the headwinds facing overall growth. Already-fragile business confidence and consumer sentiment could weaken further, weighing on investment and spending, and taking a toll on the wider economy.
Tariffs will hurt the US growth outlook. Steel and aluminum tariffs may shield a small number of US producers from foreign competition, but by raising input costs for the vastly-larger number of American manufacturers who use the metals in their processes, the Trump administration will—again—make it more difficult for them to compete in domestic and international markets. A slew of research papers** on tariff implementation during the president’s first term showed that although roughly 1,000 jobs were added in the steel industry, over 75,000 were wiped out in industries dependent on steel and aluminum inputs.
Consumer views on inflation are also vulnerable to a sustained uptick. The weekend announcement comes after the University of Michigan’s consumer sentiment survey deteriorated dramatically in early February: the headline index fell roughly 5 percent month-over-month, and the year-ahead inflation expectations index jumped. The median expectation for inflation over the year ahead surged to 4.3 percent from 3.3 percent in January, marking its highest level since November 2023, but this—as always—was driven by a starkly-partisan shift in opinion, with Democrats expecting the year-over-year increase in consumer prices to hit 5.1 percent, while Republicans (amazingly) see inflation crashing to zero.
In the days ahead, the focus will remain on developments in the Oval Office, as well as on the inflation outlook. Although he is widely expected to remain in a neutral wait-and-see stance, markets will closely parse Federal Reserve chair Jerome Powell’s comments when he delivers two rounds of Congressional testimony tomorrow and Wednesday, and could react sharply to any sign that the new administration’s trade, immigration, and fiscal spending ideas are translating into a hawkish tilt among policymakers. The US January consumer price index report will land on Wednesday, with most investors preparing for a relatively-sticky print, albeit possibly lowered by annual seasonal adjustment factors.
We expect the dollar to remain well-supported for now, but a continued difference between what Donald Trump says he will do, and what he actually does, could sap upward momentum later in the week and open some breathing room for trade-sensitive currencies like the euro, Canadian dollar, and Mexican peso.
*We may be missing several reversals (forgive us for being slightly shell-shocked).
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