Weekly Investment Commentary: Tariff turmoil

In today’s piece, Rupert looks at:

• Global equities: After three weeks of little overall changes, global equity markets saw a gain last week of 1.2% in local currency terms and 1.8% in sterling terms. The UK and Europe led the increase while the US was up and Japan slipped following a recent strong run.
• Tariffs: The US Supreme court ruled on Friday that most of Trump’s tariffs were illegal. There was no big celebration, however, as Trump, under different legislation, immediately responded with global tariffs of 10% and then 15%. The average US tariff prior to this ruling was around 16% so the net result should only be a small fall in overall tariff levels. Still, there are winners and losers. Some countries such as China will benefit from lower tariffs but others such as the UK which had negotiated a tariff of only 10%, will lose out.
• Tariff uncertainty: This ruling ushers in a renewed period of uncertainty because these new tariffs can only be imposed for a maximum of 150 days, setting the scene for Trump to impose yet a new set of tariffs in the summer under different legislation. The confusion is increased as the Supreme Court failed to rule on whether companies are entitled to a refund of $180bn or so raised form the tariffs now ruled illegal.
• US GDP: Friday saw the release of the delayed fourth quarter US GDP numbers with growth being weaker than expected. However, the government shutdown reduced growth by a bit over 1% – and should boost growth by a corresponding amount this quarter – and the underlying trend remains resilient.
• US inflation: The Fed’s favoured measure of core inflation edged up to 3.0% in December. With inflation still running significantly above the 2% target, growth is likely to be supported by tax cuts over coming months, and interest rates now back down close to a neutral level, the latest Fed meeting minutes confirmed the central bank is in no hurry to cut rates further. The next reduction is not expected until June, by when the Fed will be under new leadership.
• US-Iran and markets: Markets have been relaxed about the possibility of an attack on Iran by the US. This insouciance is based on the experience of recent conflicts in the Middle East which have had surprisingly little impact on the markets.
• In the UK: News on growth was encouraging with business confidence and retail sales being unexpectedly strong. With the Budget gloom past, inflation retreating and a further rate cut in the offing in March, growth looks well placed to pick up a bit. Still, the labor market continues to weaken and the unemployment rate up significantly. The good news is that this is feeding through to lower wage growth.  
• This coming week: Nvidia’s earnings on Wednesday will be a focus as well as ongoing US-Iran negotiations. Also, Trump’s State of the Union address on Tuesday and possibly renewed speculation about a challenge to Starmer’s leadership following the by-election in Gorton and Denton on Thursday.

Tariff turmoil

After three weeks of little overall change, global equity markets saw a gain last week of 1.2% in local currency terms and 1.8% in sterling terms. The UK and Europe led the increase with both rising 2.4% while the US was up 1.9% and Japan slipped 0.5% following its recent strong run.

Some stabilisation of the tech sector following the sharp moves seen here of late helped sentiment, as did the US Supreme Court ruling on Friday that most of Trump’s tariffs were illegal.

However, there was no big celebration as Trump immediately responded by announcing a 10% global tariff under different legislation and on Saturday increased this to 15%. The average US tariff prior to the Supreme Court ruling was around 16%, so the net result should only be a small fall in overall tariff levels.

Still, there will be winners and losers. Some countries such as China will benefit from lower tariffs but others such as the UK which had negotiated a tariff of only 10%, will lose out. Meanwhile, tariffs on sectors such as cars and steel will be unaffected.

The ruling ushers in a renewed period of uncertainty because these new tariffs can only be imposed for a maximum of 150 days, setting the scene for Trump to impose yet a new set of tariffs in the summer under different legislation. The confusion is increased further as the Supreme Court failed to rule on whether companies are entitled to a refund of the $180bn or so raised from the tariffs now ruled illegal.

But all said and done, none of this is likely to change significantly the broad economic outlook. Talking of which, Friday saw the release of the delayed fourth quarter US GDP numbers. Growth was weaker than expected at a quarterly annualised 1.4%, down from 4.4% in the third quarter. However the government shutdown reduced growth by a bit over 1% – and should boost growth by a corresponding amount this quarter – and the underlying trend remains resilient.

Meanwhile, the Fed’s favoured measure of core US inflation edged up to 3.0% in December. With inflation still running significantly above the 2% target, growth likely to be supported by tax cuts over coming months, and interest rates now back down close to a neutral level, the latest Fed meeting minutes confirmed the central bank is in no hurry to cut rates further. The next reduction is not expected until June, by when the Fed will be under new leadership.

Markets have been very relaxed about the possibility of an attack on Iran by the US. The extensive US military build-up in the region, along with Trump’s statement on Friday that the next 10 days will determine whether or not the US strikes Iran, highlights the risks. But as yet, the only asset to show the remotest interest is the oil price which climbed a further 6% last week to $72/bbl.

This insouciance is no doubt based on the experience of recent conflicts in the Middle East which have had surprisingly little impact on the markets. If there were a US attack, which led to Iran blocking the Straits of Hormuz, oil prices would no doubt jump higher. But even then, the hit to markets might be quite limited with the global economy looking reasonably well placed to deal with any such disruption.

Here in the UK, we had a torrent of economic data released and the news on growth was encouraging. Business confidence in February held on to its sizeable gain the previous month and retail sales were unexpectedly strong in December. With the Budget gloom past, inflation retreating and a further rate cut in the offing in March, growth looks well placed to pick up a bit.

Still, the labor market continues to weaken with employment in slow decline and the unemployment rate up significantly. The latter is now 5.2%, up from a low of 4.0% last summer. The good news here is that this is feeding through to lower wage growth. Earnings growth in the private sector has slowed to 3.4% and is back close to levels consistent with 2% inflation.

Indeed, inflation moderated in January with the core rate slowing to 3.1% and the headline rate to 3.0%. Partly as a result of inflation-reducing measures in the November Budget and inflation-boosting measures of the previous Budget dropping out of the calculation, inflation should fall back close to target in the spring.

This coming week, there are no major economic releases. Instead, Nvidia’s earnings on Wednesday will be a focus, as will the ongoing US-Iran negotiations. We also have Trump’s State of the Union address to look forward to on Tuesday and possibly renewed speculation about a challenge to Starmer’s leadership following the by-election in Gorton and Denton on Thursday.