Tariffs are still +10%

The three things investors should know about this week

1. The US reached a business deal with the UK, but 10% tariffs remained. Additionally, they reached a 90-day “pause” with China.
2. A 10% tariff base scenario between the US and the rest of the world is still an adverse economic outcome, versus reality pre-2025.
3. As economic uncertainty remains, we still expect lower growth, higher inflation in the US and softer employment conditions.

Summary

The UK and the US reached a business deal, alleviating pressures on steel and aluminium and promoting sales of industrial products, but 10% tariffs remained. Additionally, US officials reached a 90-day “pause” with China, temporarily lowering US tariffs to 30%. Such deals, limited in scope and time and thin on detail, may be good short-term news, especially for financial markets, but they may not be enough to outweigh increasing uncertainty. While we can’t confidently call a “recession”, our base case scenario remains that economic data will likely soon reflect the initial impact of tariffs. We expect slower growth, softer employment and varied inflation outcomes. Despite a very positive market reaction to the US-China pause, it would be premature to celebrate a breakthrough in the global trade impasse. A “business deal” and a “pause” don’t constitute “trade deals”. Time will show whether the global supply chain is robust enough to sustain such uncertainty without a costly and inflationary adjustment to cover uncertain outcomes. A 10% tariff base scenario between the US and the rest of the world is still a very adverse economic outcome.

The trade war and the economy

Last week, the world celebrated the US-UK trade and business deal, the first in what businesses and investors hope will be a flurry of such deals that will restore the flow of global trade.

The UK gets to export steel and aluminium at 0% and cars at 10% instead of 25%. It will be the first 100,000 cars at the lower rate (roughly the current number of exports), which essentially prohibits faster growth of UK car exports to the US. The US gets to export ethanol at 0% (previously at 10%-50%) and gets to sell $10bn worth of Boeing aeroplanes – in exchange for Rolls-Royce engines. The UK’s digital services tax remains, as do any potential tariffs on pharmaceuticals, while baseline tariffs remain at 10%.

While the deal is good news for steel and aluminium companies, which were facing a crunch, overall, there are plenty of unresolved issues. A British diplomat on Reuters suggested that there’s a lot more work to be done.

Trade deals are usually comprehensive documents covering thousands of goods and services, and huge technical teams, and typically take 2-5 years to complete (if bilateral, more if they are multilateral). While positive, the limited scope of the US and UK deal, and the maintenance of 10% tariffs, suggest that this is more of a “business deal” than a “trade deal”. The announced cessation of hostilities between the US and China for 90 days is positive to be sure, but it still means the maintenance of 30% tariffs for Chinese goods to the US and 10% tariffs for US goods to China. Such deals, limited in scope and time and thin on detail, may not be enough to outweigh the corporate uncertainty wrought by the imposition of US tariffs on the world.

And it may not necessarily be a blueprint of what is to come. The UK, having lost some of its geopolitical gravitas in the last decade, was eager to re-position itself within the “special relationship” with the US, and reclaim its status as a bridge between Europe and America. In the process, it agreed to mutually alleviate some pain for both Boeing and British steel and aluminium manufacturers, while acquiescing to a 10% tariff from a country with which it has a trade deficit, albeit marginal. Other countries/regions, which may feel sure about themselves, may not be so quick to agree on anything, let alone a limited deal which maintains tariffs 4x higher than the US average before January.

Still, it took nearly a month to get to the first deal, the “low-hanging fruit”. There are 184 such deals waiting between today and the 8^th of July, when the 90-day moratorium for “extra reciprocal tariffs” ends.

However, let’s keep an open mind. The real resource required is experienced trade negotiators. Let us assume that the US can produce enough trade delegations to reach similar deals with the EU, China, Japan and other major blocs within a matter of weeks. It would certainly be in the Guinness Book of Records for “most complex bureaucratic task ever achieved”, but let us assume it came to pass, and by 8 July, similar deals were in place with many other key trading partners. Or that further extensions are allowed for talks to continue.

What are we still left with?

• Unless repealed, four times the previous tariffs, which is, by and large, unsustainable.
• Likely higher inflation in the US and inflation uncertainty for everyone else.
• Lower growth for the global economy and possibly softer employment
• Corporations are very uncertain about where and how their new supply chain positioning should be.
• The longer trade disruptions last, the more the damage is done to the global economy.

Unless rolled back, in spirit and letter, tariffs will likely soon begin to bite.

The uncertainty will likely have at least a short-term and mid-term effect. The global supply chain was shocked once in 2021-2023 when China closed its borders. Then it was shocked again by American tariffs. Global businesses know that they can’t fully rely on the administration of either country to protect global trade. Time will show whether the global supply chain is robust enough to sustain such uncertainty without, at the very least, a costly and inflationary adjustment to cover future eventualities. We expect the data to reflect the new global trade realities around the summer.

And despite a very positive market reaction to the US-China pause (a pause, not a “deal”), it would be slightly premature to celebrate a “breakthrough” in the global trade impasse.

Investment implications

Markets, of course, often think in relative terms and “signals”. Upping tariffs is a “disaster”, but lowering them is “great news” for traders, even if the new level is much higher than the previous average. Presently, many investors are still hoping that the US administration will recognise tariffs to be a “bad idea”, and that one can’t turn a consumer society into a manufacturing one without significant pain and roll them back. They are also focusing a lot on Treasury Secretary Scott Bessent’s apparent leadership of the economic arm of the US administration.

As a result, equities are back into positive territory, and balanced generic portfolios are still gaining half their average annual return in the first third of the year.

Additionally, markets have calmed due to what they believe to be the reaffirmation of the “Fed Put” – the idea that the Fed will always intervene when markets are distressed. Last week, the US central bank is rumoured to have intervened to increase demand for short-term US T-Bills, the biggest such intervention since 2021. Other reports suggest wide interventions on the long end of the yield curve, lowering long-term borrowing costs.

Whatever the actual numbers are, there should be little doubt that the world’s most important central bank is still there for investors. In other words, portfolio performance, especially in equities, may not necessarily follow the economy. It’s still great news in the sense that it averts a financial crunch on the back of a potential economic slowdown, the sort of crisis that materially exacerbates economic problems. But it also means that the equity and bond markets calmed down with hopes of activation of the central bank safety net, are not accurate forecasting mechanisms for medium-term economic outcomes.

George Lagarias – Chief Economist

Market update

Markets initially fell at the start of last week, but rebounded as optimism sparked over upcoming trade talks between the US and Chinese officials in Switzerland, raising hopes for broader negotiations and potential tariff de-escalation. This was a positive contributor to Emerging Market equities in particular, which rose by +0.6%. Additionally, the announcement of a new trade deal between the US and the UK, the first new trade deal since President Trump's administration tariffs were unveiled, saw a positive reaction from markets. Meanwhile, the Federal Reserve held the federal funds target rate steady at 4.25% to 4.50%, citing an increasingly uncertain economic outlook. Although this decision was anticipated by markets, the Fed's caution about higher inflation and unemployment added to market uncertainty. These factors combined to create a mixed performance in the major indexes. Overall, this resulted in a -0.7% fall in US equities in GBP terms.

European markets also showed mixed performance - they declined by -0.3%, with some sectors experiencing gains while others faced declines, impacted by geopolitical tensions and uncertainty around economic policies in the Eurozone.

The Bank of England decided to lower its key policy rate, with a closely contested vote among its Monetary Policy Committee members. This split vote led to reduced market expectations for further rate cuts this year. The Bank of England emphasised a "gradual and careful" approach to future adjustments, noting that the decision was finely balanced before recent global developments. These are some of the factors that contributed to the -0.4% decrease in UK equities.

In fixed income market, both US and UK 10-year bond yields had +7 basis points increase (bond prices and yields move in opposite directions), also influenced by the potentially positive effects if trade negotiations and Fed's rate announcement in the US, yet remaining cautious amid uncertainty.

In the commodity space, gold and oil saw positive movements of +2.3% and +4.3% respectively.

Macro news

Trump announced a US-UK trade deal on May 8, aimed at avoiding tariffs and fostering AI and tech cooperation. The deal is more limited in scope than many had hoped, with 10% broad tariffs still in effect. British exports of steel and aluminium would now be zero-rated for tariffs, while the first 100,000 British cars sold in the US would be subject to a reduced 10% levy. In exchange, the UK will offer US farmers and ranchers improved market access through a lower-tariff quota system, but without altering its food standards, paving the way for some beef imports. The UK will remove its tariff on up to 1.4bn litres of US ethanol.

U.S. Federal Reserve Policy maintained interest rates at 4.25%–4.5%. The decision, unanimous, reflected concerns over rising risks of both higher inflation and unemployment, largely due to President Trump’s volatile tariff policies. Fed Chair Jerome Powell emphasised a “wait-and-see” approach, noting economic resilience but uncertainty around trade impacts. The Fed’s statement highlighted a negative GDP figure from the prior week and “somewhat elevated” inflation, with no clear policy response yet due to unpredictable tariff effects. Investors anticipate rates holding steady through June, with a potential cut in July. The Fed also slowed its quantitative tightening, reducing its bond runoff pace to $40 billion per month from $60 billion.

Conversely, the Bank of England’s Monetary Policy Committee (MPC) voted 5–4 to cut its key interest rate by 0.25% to 4.25%, marking the lowest rate since May 2023. Two members favoured a larger 0.5% cut to 4%, while two preferred maintaining 4.5%. The decision was driven by progress in disinflation, a loosening labour market, and slowing GDP growth, compounded by downside risks from U.S. tariffs. The BoE expects inflation to rise temporarily to 3.7% in Q3 2025 due to higher energy prices but return to the 2% target thereafter. Governor Andrew Bailey stressed a “gradual and careful” easing approach, with markets expecting further cuts to 3.6% by year-end.

In an effort to counter the impacts of the trade war, China’s central bank cut its policy rate by 0.1% to 1.4% and reduced the reserve requirement ratio by 0.5%, injecting ~1 trillion yuan (USD 138.6 billion). Recent economic data releases have indicated weak domestic demand and a sharp slowdown in the world's second-biggest economy.