Thoughts on the Market: "Trump 2.0 and the Latest on Tariffs" Hosted by Morgan Stanley
Release Date: February 5, 2025

Introduction

In the February 5, 2025 episode of Thoughts on the Market, Morgan Stanley's Michael Zesas delves into the recent developments surrounding U.S. trade policies under President Trump, particularly focusing on the latest tariff implementations and negotiations with North American neighbors and China. The discussion provides a comprehensive analysis of the potential economic and market implications stemming from these policy shifts.

Key Developments in U.S. Trade Policy

Delay of Tariffs on Mexico and Canada

President Trump reached a significant trade agreement with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau. In a series of last-minute phone calls on Monday, the U.S. agreed to postpone the previously announced 25% tariffs on Mexican and Canadian goods for one month. The primary justification for this delay, as stated by Zesas, was the administration's commitment to enhancing border security to combat migration and drug trafficking.

Michael Zesas (00:45): "President Trump agreed to delay the announced 25% tariffs on Mexico and Canada for a month, citing their intention to do more on their borders against migration and drug trafficking."

Implementation of Tariffs on Chinese Products

Contrasting the delayed tariffs on North American countries, the U.S. moved forward with imposing a 10% tariff on all Chinese products as of the previous day. China's swift response with its own set of countermeasures is expected to take effect on February 10, leaving a narrow window for potential negotiations between the two economic powerhouses.

Michael Zesas (01:10): "President Trump's 10% tariffs on all Chinese products went into effect yesterday morning. China responded promptly with its own countermeasures, which are not expected to take effect until Monday, February 10."

Market Implications and Economic Outlook

Alignment with Canada and Mexico

Zesas highlights that the decision to align tariff policies with Canada and Mexico aligns with the U.S.'s broader strategy to transform its trade relationship with China. Maintaining harmonious trade relations with North American neighbors is crucial for preserving a united front in negotiations with China.

Michael Zesas (01:50): "If the underlying goal is to transform its trade relationship with China, then the US has an interest in preserving an alignment with Canada and Mexico."

Base Case Scenario: Fast Announcements, Slow Implementation

The current trajectory suggests that while tariff announcements are happening swiftly, their implementation is unfolding gradually. Zesas maintains that tariffs on China and select European products are likely to increase through the end of the year, potentially exerting downward pressure on economic growth into 2026.

Michael Zesas (02:00): "Our base case of fast announcements, slow implementation looks intact. We expect tariffs on China and some products from Europe to ramp up through the end of the year, putting downward pressure on economic growth into 2026."

Potential Impact on the U.S. Dollar and Equity Markets

If tariffs on Mexico and Canada remain delayed or avoided, the U.S. Dollar might experience a weakening trend as it prices out certain tariff risks within U.S. equities. This scenario could favor consumer discretionary and broader cyclical stocks, presenting opportunities within specific market segments.

Michael Zesas (02:10): "The US Dollar could weaken as it prices out some tariff risk within US Equities. Consumer discretionary as well as broader cyclical stocks could lead."

Contingency: Resumption of Tariffs on North America

Should tariffs on Mexico and Canada resume post the one-month pause, the outlook shifts towards rising inflation growth slowing down. In this case, the U.S. Dollar and Treasuries are anticipated to outperform equities, at least temporarily, reflecting adjustments in investor sentiment and economic projections.

Michael Zesas (02:15): "If, however, we're wrong and tariffs do go up on Mexico and Canada after this one month pause, then we expect some rise in inflation growth to slow and the US Dollar and Treasuries to outperform equities, at least for a time."

Conclusion and Forward Look

As the United States continues to navigate and restructure its global trade relationships, tariffs are expected to remain a focal point in financial news. Michael Zesas emphasizes Morgan Stanley's commitment to monitoring these developments closely to provide timely updates and insights.

Michael Zesas (02:20): "As the US gets to work rewiring its global trade relationships, tariffs are likely to dominate news headlines in the days and months to come. We'll keep tracking the topic and bring you updates."

Listeners are encouraged to stay informed by following future episodes and sharing insights with peers to navigate the evolving market landscape effectively.

Notable Quotes

• Michael Zesas (00:45): "President Trump agreed to delay the announced 25% tariffs on Mexico and Canada for a month, citing their intention to do more on their borders against migration and drug trafficking."

• Michael Zesas (01:10): "President Trump's 10% tariffs on all Chinese products went into effect yesterday morning. China responded promptly with its own countermeasures, which are not expected to take effect until Monday, February 10."

• Michael Zesas (02:10): "The US Dollar could weaken as it prices out some tariff risk within US Equities. Consumer discretionary as well as broader cyclical stocks could lead."

Disclaimer: The content provided is for informational purposes only and does not constitute financial advice. It may not consider individual financial circumstances or objectives and may not be suitable for all investors.