Tariff Watch Wednesday

At the risk of stating the obvious, Wednesday was chock full of tariff news—as if any day of the week isn’t lately. But there really was a smorgasbord of nuggets showing what markets continue dealing with. Here is the rundown.

The China “Deal” Gets Reheated

The biggest news: The Trump administration’s deal to make a deal with China is back on. Last month, both sides agreed to chop triple-digit tariffs to double-digit for 90 days while they negotiated a broader deal. The US’s additional tariffs on China dropped to 30% (blanket 10% tariff plus the 20% levy tied to the fentanyl emergency), and China’s additional tariffs on the US dropped to 10%. But as with the agreement with the UK, it wasn’t an actual deal, but rather a framework of what they eventually hoped to agree to. Think of it as a tariff ceasefire while trade peace talks continued.

But those talks seemingly fell apart quickly as each side accused the other of violating the preliminary agreement. Tariffs didn’t go back over 100%, but as the US talked tough over student visas and military-related exports and China rationed rare earths, it raised fears that the truce would expire without a deal, taking us back to April’s sky-high rates. However, President Donald Trump and Chinese President Xi Jinping broke the ice last week, teeing up fresh talks between trade delegates in London this week.

Those talks are now done, with both sides agreeing late Tuesday night to extend and firm up May’s deal. It is another deal to make a deal, subject to approval by Trump and Xi. Trump blessed it Wednesday, confusing some people by noting it brings US tariffs on China to 55%, which is a lot higher than 30%. But this isn’t a change. It is the total tariff rate, including the 30% additional tariff plus the 25% levy enacted during Trump’s first term, which got lost in most coverage last month.

So tariffs didn’t change this week, and they remain higher than when Trump took office—still a negative, in our view, adding costs and hassle for businesses. Uncertainty, the main headwind, also hasn’t gone away. The deal is broadly an agreement to climb down on student visas, US aircraft and semiconductor exports and China’s rare earths controls, which should help ease concerns about shortages at US auto factories. But the rare earths reprieve lasts only six months, according to Wall Street Journal reports, and plenty of sticking points remain en route to an actual signed, sealed and delivered deal.^[i] Six months is longer than 90 days, but trade negotiations usually take years to complete, and the US has many more irons in the fire.

Therefore, we doubt businesses feel much longer-term relief, as welcome as the lower tariffs are. There is still the risk of talks falling through. Or further changes as negotiations ebb and flow and the two sides jockey for leverage. And with the specter of reciprocal tariffs still looming over Vietnam, Taiwan and other apparent transshipping hubs next month, businesses still lack clarity on how best to rejigger supply chains if talks fall through. To us, it all incentivizes businesses taking a wait-and-see mentality, which can weigh on investment. Stocks are aware of this, but it is possible weak economic data could still weigh on sentiment.

The Stay on Last Month’s Court Ruling Continues

Meanwhile, the Court for International Trade’s (CIT’s) ruling that Trump’s tariffs violate the separation of powers remains on ice, per the US Court of Appeals for the Federal Circuit’s decision Tuesday. After the CIT’s decision, the Trump administration appealed and requested a stay, arguing canceling the tariffs immediately would weaken its hand in ongoing trade talks. That request was granted on a temporary basis, pending a hearing of both sides’ arguments for and against a stay. The Appeals Court has now heard those arguments and agreed to extend the stay, preserving tariffs as the legal process plays out.

Hence, the CIT’s ruling still doesn’t offer investors and businesses relief. It is an important step, but it doesn’t ease uncertainty. Nor does Tuesday’s decision. The Appeals Court didn’t bless the tariffs. It just agreed to allow them to remain as the case continues. Positively, the court does appear to be fast-tracking this, with the next hearing set tentatively for July 31. But even if this segment goes quickly, the case looks likely to end up at the Supreme Court, adding time. It could still be a year or two before we get a final ruling. Which, too, is well-known—all we learned for sure Tuesday is that tariffs will remain while this uncertainty continues. That isn’t good, but at this point, it isn’t a surprise. And surprises move markets most.

May CPI Was Never Going to Hint at Tariffs’ Inflationary Effects

May’s Consumer Price Index (CPI) inflation report hit the wires Wednesday, bringing a pleasant surprise: The headline inflation rate missed expectations, accelerating just slightly from 2.3% y/y to 2.4%, while core inflation (excluding food and energy) held steady at 2.8%.^[ii] The inflation rate in core goods, theoretically most vulnerable to tariffs, inched from 0.1% y/y to just 0.3%.^[iii] This brought a mix of cheer and fear, as some breathed a sigh of relief while others warned the pain is yet to come.

We guess this is half right. To the extent businesses pass on tariff costs, May’s data were always unlikely to show it, for a simple reason: Businesses front-ran tariffs, stockpiling imported goods and components before Liberation Day. A lot of the merchandise on shelves and pegs right now is from this pre-tariff inventory, and many businesses are only just now formulating plans on what they will and won’t try to pass on. It will take time for added costs to flow through the system. 

But we also think the just you wait crowd is probably mostly wrong. Tariffs may affect the prices of individual goods, yes. But that isn’t inflation. Inflation is a broad increase of goods and services prices across the entire economy. Every month’s report will see big outliers in both directions, with some prices up big and others falling. Inflation is about how the broad totality of this evens out … not about the outliers.

And the simple, oft-forgot truth is that, regardless of the cost pressures businesses may face, you likely won’t get hot inflation without swift money supply growth. The US doesn’t have this. M4, the broadest measure, is growing at tame, prepandemic rates. In 2022, we got hot inflation largely because M4 growth spiked over 30% y/y in 2020 as the Fed threw money at COVID lockdowns.^[iv] In April, M4 grew just 4.0%, well in line with growth rates in the mid-2010s.^[v] That, you might remember, was a time when most people thought inflation was too low.

So yes, we might see prices in some individual goods rise as businesses pass the buck. But over 60% of CPI is services, which are largely insulated from tariffs.^[vi] Still more of the goods face exemptions and, yes, not all those goods are imported. And with tariff collection continuing to undershoot worst-case expectations (which it did in May once again), so far there doesn’t appear to be much for businesses to actually pass on, outside high-profile pain points like autos.^[vii] So we see a lot of room for inflation reality to beat expectations, giving stocks a nice dose of positive surprise.