Lingering Uncertainties After Tariff Reprieve - Thoughts on the Market

Summary

Podcast Summary: "Lingering Uncertainties After Tariff Reprieve"

Podcast Information:

Title: Thoughts on the Market
Host/Author: Morgan Stanley
Episode: Lingering Uncertainties After Tariff Reprieve
Release Date: April 10, 2025

Introduction

In the April 10, 2025 episode of Thoughts on the Market, Michael Zesas, Morgan Stanley's Global Head of Fixed Income Research and Public Policy Strategy, delves into the tumultuous week in financial markets triggered by unexpected changes in U.S. tariff policies. The episode, titled "Lingering Uncertainties After Tariff Reprieve," provides a comprehensive analysis of the recent tariff developments, their immediate impact on markets, and the potential long-term implications for the global economy.

Context of Recent Tariff Announcements

The episode opens with Zesas setting the stage for what has been an unprecedented week for financial markets. He recounts how the volatility commenced on April 2nd following President Trump's announcement that new reciprocal tariffs would take effect on April 9th. This move was stacked upon previously announced tariffs, including additional impositions on China, culminating in the U.S. committing to tariff levels not seen in a century.

"It all added up to a promise by the US to raise its average tariffs to levels not seen in 100 years," Zesas explains (00:45).

Market Reactions

The reaction from equity markets was swift and severe. Investor anxiety over the U.S. retreating from global trade commitments led to a sharp sell-off, with the S&P experiencing a significant downturn. Bond markets mirrored this distress, with yields rising contrary to the typical decline seen in growth concerns, signaling weakened market liquidity.

"The combined equity and bond market behavior was not a healthy situation," Zesas notes (01:15).

Tariff Reprieve and Immediate Impact

Amidst the turmoil, President Trump announced a 90-day pause on the implementation of most new tariffs, aiming to provide a window for further negotiations. This unexpected reprieve provided immediate relief to the markets, with the S&P rebounding by approximately 9% on the day of the announcement.

"President Trump announced he would delay the implementation of most new tariffs by 90 days to allow negotiations to progress," Zesas remarks (02:05). This strategic pause temporarily assuaged investor fears, highlighting the market's sensitivity to U.S. trade policy decisions.

Lingering Uncertainties and Future Implications

Despite the temporary relief, Zesas emphasizes that significant uncertainties remain. Key questions persist about the durability of the tariff reprieve and its broader economic implications. The higher tariff levels, even with the pause, still surpass those from a week prior, raising concerns about sustained economic slowdown and increased recession risks.

"Will this 90-day reprieve hold or just delay inevitable tariff escalation?" Zesas questions (02:45). Additionally, the rapid shifts in economic policy have potentially eroded consumer and business confidence, a factor that could have lasting impacts on investment and growth.

Insights on US-China Trade Relations

A critical element discussed is the strained relationship between the U.S. and China. Zesas points out that the U.S.'s intention to enhance supply chain security and reduce the goods trade deficit complicates negotiations with China. These efforts are likely to result in prolonged and higher tariffs, adversely affecting sectors reliant on stable supply chains, such as technology, hardware, and consumer goods.

"The trade relationship with China should be strained and that will continue to weigh on markets," he asserts (03:20). The challenges of reconfiguring supply chains in response to sustained tariffs present significant hurdles for key industries, potentially dampening economic growth prospects.

Conclusion and Key Takeaways

Michael Zesas concludes by highlighting the importance of monitoring measures of confidence among consumers and businesses in the coming weeks. He underscores that while the 90-day tariff reprieve offers temporary respite, the overarching uncertainties in U.S. trade policy remain a critical factor for investors and market stakeholders.

"We'll need to watch measures of confidence carefully in the coming weeks," Zesas advises (03:10).

Key Takeaways:

The U.S. government's aggressive tariff policies have significantly heightened market volatility.
The 90-day tariff reprieve provides temporary relief but does not eliminate underlying economic uncertainties.
Persistent tensions with China and the resulting trade policies are likely to have long-term negative impacts on key sectors.
Monitoring consumer and business confidence will be crucial in assessing future market directions.

Notable Quotes:

"It all added up to a promise by the US to raise its average tariffs to levels not seen in 100 years." – Michael Zesas (00:45)
"The combined equity and bond market behavior was not a healthy situation." – Michael Zesas (01:15)
"President Trump announced he would delay the implementation of most new tariffs by 90 days to allow negotiations to progress." – Michael Zesas (02:05)
"Will this 90-day reprieve hold or just delay inevitable tariff escalation?" – Michael Zesas (02:45)
"The trade relationship with China should be strained and that will continue to weigh on markets." – Michael Zesas (03:20)
"We'll need to watch measures of confidence carefully in the coming weeks." – Michael Zesas (03:10)

Conclusion

This episode of Thoughts on the Market offers a detailed examination of the recent tariff developments and their profound impact on financial markets. Michael Zesas provides valuable insights into the immediate effects of the tariff pause and outlines the persistent uncertainties that investors and businesses must navigate. The episode serves as an essential resource for understanding the complexities of U.S. trade policies and their broader economic implications.

Transcript

A (0:00)

Welcome to Thoughts on the Market. I'm Michael Zesas, Morgan Stanley's global head of fixed income research and public policy strategy. Today, possible Outcomes of President Trump's Sudden Pause on Reciprocal tariffs It's Wednesday, April 9th at 10:00pm in New York. We actually planned a different episode for release today where my colleague, Global Chief Economist Seth Carpenter and I laid out developments in the market thus far and looked at different sets of potential outcomes. Needless to say, all of that changed after President Trump announced a 90 day pause on most tariffs that were set to rise, and so we need to update our thinking. It's been a truly unprecedented week for financial markets. The volatility started on April 2nd with President Trump's announcement that new reciprocal tariffs would take effect on April 9. When added to already announced tariffs and later adding even more tariffs in for China, it all added up to a promise by the US to raise its average tariffs to levels not seen in 100 years. Understandably, equity markets sold off in a volatile fashion, reflecting investor concerns that the US Was committed to retrenching from global trade, inviting recession and an economic future with less potential growth. The bond market also showed signs of considerable strain. Instead of yields falling to reflect growth concerns, they started rising and market liquidity weakened. The exact rationale is still hard to pin down, but needless to say, the combined equity and bond market behavior was not a healthy situation. Then a reprieve. President Trump announced he would delay the implementation of most new tariffs by 90 days to allow negotiations to progress. And though we would keep China tariffs at levels over 100%, the announcement was enough to boost equity markets, with the S and p gaining around 9% on the day. So what does it all mean? We're still sorting it out for ourselves, but here's some initial takeaways and questions we think will be important to answer in the coming days. First, there's still plenty of lingering uncertainties to deal with, so investors can't put US policy risk behind them. Will this 90 day reprieve hold or just delay inevitable tariff escalation? And even if the reprieve holds, do markets still need to price in slower economic growth and higher recession risk? After all, US Tariff levels are still considerably higher than they were a week ago, and the experience of this market sell off and rapid shifts in economic policy may have impacted consumer and business confidence. In my travels this week, I spent considerable time with corporate leaders who are struggling to figure out how to make strategic decisions amidst this uncertainty. So we'll need to watch measures of confidence carefully in the coming weeks. One signal amidst the noise is about China, specifically that the U.S. s desire to improve supply chain security and reduce the goods trade deficit would make for difficult negotiations with China and ultimately higher tariffs that would stay on for longer relative to other countries. That appears to be playing out here, albeit faster and more severely than we anticipated. So even if tariff relief is durable for the rest of the world, the trade relationship with China should be strained and that will continue to weigh on markets where cost to rewire supply chains around this situation could weigh on key sectors like tech, hardware and consumer goods. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.