Markets’ Trump truce is on ever-shakier ground

If stock markets are to be believed, Donald Trump has pulled off a masterstroke. The US president has ratcheted up tariffs on trading partners while avoiding tanking either the economy or asset prices. Yet investors' muted response to Thursday's latest levies may be misleading. The Trump-market truce will soon face steeper tests.

Equities have come a long way since April 2, when the president's so-called reciprocal tariffs sent the S&P 500 Index down about 10 percent in a week. Stocks quickly bounced back and then set records, boosted by the idea that Trump would always chicken out, known as the TACO trade.

That theory is crumbling. Thursday's assault raised the average US levy on imports to about 20 percent – not far off the April 2 level of 22 percent, Société Générale economists reckon. Canada, Switzerland and others saw their scheduled duties spike. Yet S&P 500 futures fell just 1 percent before US markets opened, which would still leave the benchmark about a quarter above its April nadir.

There are some good reasons for the nonchalance. Some levies, like India's 25 percent rate, may yet come down. The new package may just be a last-minute ploy to maximise pressure on trading partners before striking deals. And the most damaging scenario – a global trade war – looks unlikely given key trading partners like Europe and Japan have agreed deals without retaliation. Lastly, even if tariffs are now a reality, looser fiscal policy in the US and Germany means there is more money sloshing around two of the world's biggest economies, helping short-term growth.

Yet the full brunt of the tariff war is still only starting to emerge, and the final implementation of the global levies is due next week. Core US goods inflation was a reassuring 2.4 percent in July, yet price rises may have been kept lower by importers bringing in more goods ahead of the duties. Analysts at Pictet reckon the impact will become more apparent in August and September. They note that surveys point to between 60 percent and 80 percent of US firms planning price increases over the next three months. That may squeeze consumer confidence, hurting growth.

Higher US inflation may also make it harder for the Federal Reserve to cut. That will fuel tensions with Trump, who has a $1.9-trillion deficit to fund this year and wants lower rates. The more the administration attacks Chair Jerome Powell, the more bond markets will fret over wayward fiscal policy and higher inflation, driving up long-term borrowing costs and hitting asset prices.

Nor can the rest of the world rest easy. As other countries face more obstacles selling the $3.3 trillion of goods shipped into the United States annually, they will need to find alternative markets, driving down prices elsewhere and hurting rival exporters.

Governments like Britain and France can't afford to offset the hit, given stretched budgets. In other words, the full pain of Trump's global tariff onslaught may still be coming.

US President Donald Trump on July 31 signed an executive order imposing import tariffs ranging from 10 percent to 41 percent on 69 trading partners ahead of an August 1 trade-deal deadline.

He issued a separate order raising duties on Canadian goods subject to fentanyl-related tariffs to 35 percent, from 25 percent previously.

Trump granted Mexico a 90-day reprieve from higher tariffs of 30 percent on many goods to allow time to negotiate a broader trade pact.