Tariffs: more than a risk to trade
This week has emphasised just how quickly deteriorating confidence in the sustainability of public finances can unwind support for a currency. This of course has been evident in GBP as we have covered. Despite a small recovery yesterday, helped by weak US data, the local currency continues to underperform. This time around, the rout in long term debt hasn’t been global. It has been largely concentrated on the fiscal risks in the UK. If anything, prices on alternative long dated debt in the eurozone or US have been able to benefit from the rotation away from the UK.
Given the Fed’s latest beige book publication, that could be seen as surprising. The beige book is a publication made eight times a year which shows the Fed’s take on all things economic. The reason markets and the public alike care about it is because it’s a frank assessment of the positive and negative risks facing the US economy without the rigidity demanded by talking about those events with respect to monetary policy. Yesterday’s publication doesn’t make for easy reading. Unsurprisingly, it is all about tariffs and the risk they pose to growth and price stability at the business and household levels.
At the same time, it is clear the bond market is seeing tariff revenues as necessary to afford the tax cuts POTUS has pursued. Between the Fed, the judiciary, bond markets and the economy, it’s clear the US economy cannot live with tariffs but for now also can’t live without them. Therefore, when we consider the fresh legal challenges to President Trump’s tariffs, the US fiscal backdrop is far from stable. Sadly, that reality is unlikely to turn attention from the UK’s deteriorating fiscal position and instead shows how easily this regional bond market tantrum could turn global.
Discussion and Analysis by Charles Porter
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