Podcast Summary: "Why Markets Remain Murky on Tariff Fallout"
Episode Information:
- Title: Thoughts on the Market
- Host/Author: Morgan Stanley
- Episode: Why Markets Remain Murky on Tariff Fallout
- Release Date: August 1, 2025
Introduction
In the August 1, 2025 episode of Thoughts on the Market, hosted by Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy at Morgan Stanley, the focus is on the ongoing effects of tariffs on the U.S. economy. Joining him is Michael Gapen, Chief U.S. Economist, to delve into recent trade developments and their implications for the market.
Recent Trade Agreements and Tariff Rates
Timestamp [00:00 - 03:07]
The conversation begins with an overview of the latest U.S. trade agreements, particularly with Japan and Europe. Michael Zezas remarks:
"We have an agreement with Japan and an agreement with Europe, two pretty substantial trading partners, where it appears the tariff rate that's going to be applied is something like 15%." ([02:15])
He highlights that these agreements have narrowed the near-term uncertainty around tariff rates, bringing the average effective U.S. tariff rate down to a range of 15-20%, compared to the previously anticipated 25-30%. However, Zezas cautions that long-term uncertainties remain due to the contingent nature of these agreements, which could lead to future escalations if certain conditions, such as Europe's commitment to purchasing U.S. energy, are not met.
Impact on Inflation and Consumer Spending
Timestamp [03:07 - 05:24]
Michael Gapen provides insights into how tariffs are poised to influence inflation and consumer behavior:
"We've long been forecasting that inflation would begin to pick up in June. We saw a little of that, but it would accelerate through the third quarter, kind of peaking around the August, September period." ([04:00])
He explains that tariffs act as a regressive tax, disproportionately affecting low and middle-income consumers who spend a larger portion of their income on non-discretionary goods. Gapen anticipates a slowdown in consumer spending, particularly in these demographic groups, as the higher costs of goods begin to take effect.
Market Perception vs. Actual Impact
Timestamp [05:24 - 06:35]
Zezas addresses the prevailing market sentiment that may have already priced in the effects of tariff escalations:
"We're about to get some real evidence from economic data as to whether or not that view and those assumptions are credible." ([05:24])
He emphasizes that while the market may believe it has absorbed the tariffs, the forthcoming economic data will provide concrete evidence of their true impact on economic activity.
Business Spending and GDP Data Analysis
Timestamp [06:35 - 09:16]
Delving into recent GDP reports, Gapen discusses the volatility in trade and its repercussions on economic growth:
"Final sales to Domestic purchasers, which includes consumption and business spending, was only up 1.1% in the quarter. So the economy's moderating. Things are cooling." ([07:45])
He notes that the second quarter saw subdued capital spending, with equipment spending increasing marginally while investments in structures decreased significantly. This moderation is partly attributed to elevated trade policy uncertainty, which has dampened business confidence and investment.
Future Outlook
Timestamp [09:16 - 10:00]
As the conversation wraps up, Zezas transitions the discussion to the forward-looking perspective:
"As we move into the third quarter... activity data and the Fed will now become much more important over the next several months." ([09:16])
Gapen agrees, highlighting that upcoming inflation and employment reports will be pivotal in shaping Federal Reserve policies and, consequently, the broader economic landscape.
Conclusion
The episode concludes with both hosts acknowledging the complexities surrounding tariff policies and their multifaceted impacts on the economy. While recent agreements have provided some short-term clarity, long-term uncertainties linger, necessitating close monitoring of economic indicators to gauge the true effects of ongoing trade policies.
For those interested in the intricate dynamics of trade policies and their implications on the market, this episode offers valuable insights from top economists at Morgan Stanley.