This week, United States President Donald Trump is expected to make a big announcement. As he prepares to announce a new billion dollar round of tariffs TARIFFS HURT AMERICANS – U.S. These changes, when fully phased in, will increase the US’s trade-weighted average tariff rate on all imports. Plan on an increase of at least 5.5 to 6.0 percentage points. If enacted, this increase would raise tariffs to a level not seen since the Second World War. How he uses tariffs in his second term would be different. Now he appears to be moving them from use as a bargaining chip to making them an objective. There are growing fears that these tariffs could cause inflation and slow economic growth, thereby weakening the US Dollar.
The ramifications of Trump’s tariff maneuver reach beyond U.S. borders, with global market movement likely to be felt across the week. This is not to downplay the long-term success of these tariffs, as global trade adapts and changes, but the short-term impacts are inarguable. Central banks around the world, including our own Reserve Bank of Australia (RBA), have been watching these movements with a wary eye. The RBA has raised rates above the rest of the central banks. Yet growing uncertainties in global trade may force them to make surprising last-minute moves in their strategy.
Tariffs and Their Global Impact
Trump’s decision to impose new tariffs is expected to ripple well beyond American shores. Australia’s economy, too, will be directly impacted by this step. Trump’s announcement of these new tariffs on a reciprocal basis will reverberate throughout global markets with an apocalyptic like sound. As a result, central banks will have to reconsider their mandates.
Central banks are acutely sensitive in these interconnected times, where policy actions taken in one corner of the world can affect deliberations made in another. The RBA, by contrast, has been reticent to cut interest rates and has stuck with a hawkish bias. The intensifying risks to international trade could force RBA Governor Michelle Bullock’s hand. She will likely face pressure to cut interest rates in a preemptive move.
Plus, soft tariffs and mild retaliation from Europe, Canada and Mexico would be a net positive for equities. Investors are paying close attention to how companies with direct ties to consumer-facing markets view the economy as these tariff shifts take place.
Economic Indicators and Market Reactions
Their announcement of new tariffs comes at an especially bad time, as some major economic indicators are scheduled to be released later this week. The Employment Component, in our opinion, is the most important leading indicator to look at just days ahead of this Friday’s Nonfarm Payrolls report. Additionally, the Institute for Supply Management (ISM) Purchasing Managers Indexes (PMIs), which are forward-looking business surveys, will provide insights into market sentiments during March when trade tensions escalated.
These are three indicators that all economists will be eyeing closely as they provide some of the most informative pictures of where the economy stands. The ISM PMIs, especially the ISM Services PMIs, will give some sense of how businesses are bracing themselves for the new tariffs to create disruption. Investors will closely monitor these leading indicators to assess market response and adjust strategies accordingly.
Inflation Concerns and Economic Growth
We all recognize that imposing new tariffs further increases inflationary pressure, which threatens to choke off improving economic growth. We will argue that higher tariffs are already raising costs for U.S. businesses, which in turn will be passed down to consumers. This perfect storm would push inflation even higher. In doing so, consumers are likely to lose significant purchasing power, removing meaningful economic activity from the economy.
The future strength of the US Dollar is under immense peril. Investor confidence is further shaken by concerns about inflation and a slow growing economy. The longer-term shift towards a weaker dollar would have significant repercussions for global trade and financial markets. There’s little doubt currency markets are among the most closely watched by market participants. In addition, they want to know how these tariffs will influence the overall international trade environment.