Morning Brew Daily: What Trump Tariffs Mean for Prices & Fed Cuts Rates, but Mortgages Are Up?

Release Date: November 8, 2024

Hosts: Neal Freyman & Toby Howell
Podcast: Morning Brew Daily
Description: A daily talk show covering the latest news on business, the economy, and more, hosted by Neal Freyman and Toby Howell. Available on all podcasting platforms and YouTube.

1. Global Incumbent Defeats Amidst Rising Inflation

Neal Freyman opens the discussion by highlighting a historic trend where all incumbent political parties across ten countries—including the UK, France, Japan, and the United States—suffered defeats in recent elections. He attributes this unprecedented outcome primarily to widespread inflation, which has significantly impacted voters' cost of living.

“Every governing party faced an election this year. All 10 from the UK to France to Japan to the United States lost vote share. It’s the first time this has ever happened.”
[00:42]

Toby Howell adds that while macroeconomic indicators might appear stable, the personal financial strain from inflation has driven voters to reject current leadership, emphasizing the disconnect between national economic health and individual financial well-being.

“Voters appear to have said my life has gotten way more expensive. People in charge, you’re fired.”
[01:25]

2. Federal Reserve Cuts Interest Rates Amid Rising Mortgage Rates

The hosts delve into the Federal Reserve's recent decision to cut interest rates for the second time this year, contrasting it with the unexpected rise in mortgage rates.

Neal Freyman explains that the Fed's rate cuts, including a quarter-point decrease following a half-point cut in September, signal confidence in controlling inflation and a focus on maintaining low unemployment. However, despite these monetary policies, the average 30-year fixed mortgage rate has surged by over half a percentage point to 6.97%.

“The Federal Reserve cut interest rates for the second time this year, but mortgage rates have risen more than half a percentage point to reach 6.97% this week.”
[05:00]

Toby Howell points out that this anomaly is perplexing because mortgage rates are typically expected to decrease with Fed rate cuts. He attributes the rise to the influence of the 10-year Treasury yield, which reflects long-term economic expectations and suggests continued economic strength, thus keeping mortgage rates high.

“Mortgage rates follow the 10-year yield and not the Fed’s rate cuts, indicating that investors believe the economy will continue to grow and possibly stoke more inflation in the long term.”
[06:28]

3. Jerome Powell and Donald Trump: A Tenuous Relationship

A significant portion of the episode is dedicated to exploring the strained relationship between Federal Reserve Chair Jerome Powell and former President Donald Trump. Toby Howell outlines how Trump, despite appointing Powell, became critical of him for not lowering interest rates swiftly enough, labeling him an enemy.

Neal Freyman shares a pivotal moment from a recent press conference where Powell firmly responded to a reporter's question about the president's power to fire him.

“Do you believe the president has the power to fire or demote you?”
Reporter: “Not permitted under the law.”
[04:59]

This exchange underscores the Fed's commitment to its independence, a principle established in 1951 to prevent political interference in monetary policy. However, with Trump poised to potentially reappoint or replace Powell in 2026, the future of the Fed's autonomy remains uncertain.

4. Potential Trump Tariffs and Their Global Impact

The discussion shifts to the implications of a possible Trump re-election, particularly focusing on his proposed tariffs and their potential to disrupt global trade.

Neal Freyman highlights Trump's pledge of up to 20% tariffs on all US imports and a staggering 60% tariff on goods from China. These measures, if implemented, would represent the highest tariffs in a century, aiming to protect domestic industries by making foreign products more expensive in the US market.

“Trump’s proposed tariffs would be the highest the US has seen in 100 years, fundamentally reshaping global trade.”
[10:08]

Toby Howell discusses the dual nature of these tariffs—as both actual duties and bargaining tools. Given the US economy's significant growth within the G7, other nations may use the threat of reduced access to the US market as leverage in negotiations, potentially preventing the full implementation of the tariffs.

“Tariffs could either be fully applied or serve as bargaining chips in trade negotiations, leveraging the US economy’s substantial growth.”
[11:25]

5. Impact on Key Economies: Europe and China

Germany and Europe are identified as primary losers if Trump's tariffs come to fruition. With Germany's automotive sector heavily reliant on US exports, a 20% tariff on cars would severely impact manufacturers like Volkswagen, leading to factory closures and economic downturns.

“Germany is seen as a loser in this new paradigm. Volkswagen is set to close factories in Germany for the first time.”
[12:03]

China, already grappling with economic challenges, would face exacerbated issues from the proposed tariffs. The anticipation of increased inflation due to stimulated demand from tariffs could lead the Federal Reserve to adjust its rate-cut strategy. To mitigate economic pain, China has initiated a $1.4 trillion stimulus package to refinance local government debt.

“China announced a $1.4 trillion program to refinance local government debt in preparation for economic challenges under a Trump presidency.”
[14:11]

6. Sector-Specific Consequences: Retail and Shipping

The episode examines how tariffs would unevenly affect sectors like retail and shipping. Retailers importing goods from China, such as American Eagle and Crocs, face increased costs either by absorbing them or passing them onto consumers, potentially leading to higher prices and reduced consumer spending.

Neal Freyman notes that while large retailers like Walmart and Amazon might withstand the cost increases due to their scale, smaller retailers could struggle, resulting in a market where big players gain further dominance.

“Smaller retailers exposed to China are at high risk, whereas giants like Walmart can absorb or pass on the costs, exacerbating market concentration.”
[16:05]

Toby Howell adds that shipping companies are also feeling the pressure. Domestic trucking stocks like JB Hunt and Schneider National have rallied due to increased imports, while ocean carriers like Maersk have seen declines as tariffs disrupt global supply chains.

“Domestic trucking companies are benefiting from increased imports, whereas ocean carriers are experiencing slumps due to disrupted supply routes.”
[20:07]

7. Outlook and Future Implications

The hosts conclude by emphasizing the potential for significant upheaval in the global economic order over the next four years if Trump's tariffs are implemented. Countries and companies must navigate these changes strategically, with some regions like Brazil possibly benefiting from a shift in trade dynamics away from China.

“The next four years could see dramatic reshuffling in the global economy, with nations like Brazil potentially gaining from decreased reliance on China.”
[14:57]

Notable Quotes:

• “We don’t guess, we don’t speculate, we don’t assume about which campaign plans will be made into reality in the near term.”
  — Jerome Powell, responding to questions about presidential influence on Fed decisions
  [04:59]

• “Mortgage rates follow the 10-year yield and not the Fed’s rate cuts, indicating that investors believe the economy will continue to grow and possibly stoke more inflation in the long term.”
  — Toby Howell
  [06:28]

• “Trump’s proposed tariffs would be the highest the US has seen in 100 years, fundamentally reshaping global trade.”
  — Neal Freyman
  [10:08]

Conclusion:

In this episode of Morning Brew Daily, Neal Freyman and Toby Howell navigate the complex interplay between political shifts, economic policies, and their far-reaching consequences. From global election trends driven by inflation to the intricate dynamics between the Federal Reserve and potential Trump tariffs, the hosts provide a comprehensive analysis of the current economic landscape. The unexpected rise in mortgage rates despite Fed rate cuts underscores the unpredictable nature of the economy, while the looming specter of high tariffs threatens to redefine international trade relations. As the world stands on the brink of significant economic transformations, listeners are equipped with insightful perspectives to understand and anticipate the future trajectory of global markets.