Snapshot - Managers' views
Trump targets Mexico, hits the Fed
We cannot be sure if Trump’s Mexican tariffs are just part of his bargaining strategy, but it may get him the Fed rate cut he wants.
Interest rate expectations have moved significantly over the past week following President Trump’s tweet that he was putting tariffs on Mexico. The market is now pricing in nearly three rate cuts of a quarter point each this year from the US Federal Reserve (Fed). Only a week ago the market was pricing in just one.
Our view has been that the Fed would ease, but not until next year when there would be more evidence of a slowdown in activity.
Alongside the stalling in the US-China talks, the latest tariffs represent a ratcheting up of trade tensions and would hit growth, not just in Mexico but also in the US. Macro-models suggest US GDP would be some 0.7 percentage points weaker in 2020 than otherwise. This would put the US in recession on our forecasts.
As always with President Trump one cannot be certain whether his latest move is part of a bargaining strategy and that ultimately he will not follow through. The problem for the Fed is that the market seems to have decided he means it. Consequently it is more difficult for the central bank to push back without triggering considerable financial volatility.
Looking at the impact on the economy, higher tariffs hit trade but much of the near-term effect is likely to be through weaker confidence and falling equity markets, areas the Fed can influence.
Chair Jerome Powell offered markets some reassurance yesterday when he said the Fed was monitoring the implications of the trade negotiations and would act appropriately to sustain the expansion. Meanwhile, there are signs that the economy is cooling and inflation remains low so there is little to stop the Fed making a precautionary “insurance” cut. This could come in late July but more likely September.
It remains to be seen whether Trump’s threats on tariffs achieve a resolution of the immigration crisis with Mexico, but it may get him the rate cut he wanted from the Fed.
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material, including the website, has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.