New Tariffs Coming As Inflation Persists

It is Still Inflation, Inflation, Inflation!

In a holiday-shortened market week, there was a lot of information for investors to digest as they got together with family for the traditional Thanksgiving feast. Finance professionals pleased at President-elect Donald Trump naming hedge fund manager Scott Bessent to be the next Treasury Secretary were met by Trump’s threat of new tariffs on products coming from Canada, Mexico and China. The Personal Consumption Expenditure price index, the Federal Reserve’s favorite measure, signaled an acceleration in annual inflation on both headline and core bases.

Lastly, minutes of the Federal Open Market Committee meeting held on November 6 and 7 noted that “real GDP posted a solid gain in the third quarter that was similar to its second-quarter pace.” Not surprisingly, the FOMC provided no explanation as to why, in that case, it found it necessary to lower the Federal Funds rate by a more-than-expected 50 basis points at the September meeting. We know, of course, that if the rate cut had boosted the economy, that may have helped the presidential aspirations of Vice President Kamala Harris. Not a big deal for the Fed if inflation subsequently accelerates as a result of policy easing. But no way can the Fed acknowledge such calculations because it has to repeat claims that it is an apolitical entity!

And inflation did accelerate. Measured by the Personal Consumption Expenditure index, headline prices rose by 2.3% in the year ending October compared with a 2.1% rise the previous month. Excluding food and energy which are considered to be volatile elements, the rate of change of the core index picked up from 2.7% in September to 2.8% last month.

Meanwhile, initial jobless claims fell to 213,000 in the latest week, marking the lowest figure in four months. And a second estimate of GDP growth in the third quarter came out at 2.8%, unchanged from the preliminary estimate. There is no sign of recession that would call for the Federal Reserve to intervene. Juxtapose these data points with Federal Reserve Chairman Jerome Powell’s repeated claims that inflation was coming down to the central bank’s 2% target while a softening labor market warranted aggressive action to ease monetary policy. What you have is confused monetary policy that has kept the Treasury market volatile.

It was in the context of reaccelerating inflation and continued economic growth that President-elect Trump announced Monday that new tariffs would be imposed on imports from Canada, Mexico and China, three of the United States’ largest trade partners. A tariff of 25% on all Canadian and Mexican products will be imposed on January 20, his first day in office as President, Trump said. In the case of China, there would be an additional 10% tariff instituted on top of duties already levied during the first Trump term and continued by the Biden administration. The objective of the new taxes would be to counter the flow into the United States of illegal drugs and immigrants.

The initial reaction of gold, the dollar and Treasurys was deceptively benign in an action-packed week — for a reason discussed later. After falling during the first part of the week, the price of gold ended the week at $2,674 per ounce, about where it started. The acceleration in inflation was not sufficient to propel the gold price upward because the faster pace of PCE inflation had been anticipated. However, expectation in futures markets that the Fed will institute another rate reduction next month despite the stubborn inflation rate was a factor in gold’s late rally.

The dollar, which had appreciated intra-day to $1.034 per euro on November 22, depreciated to $1.058 per euro last night. The yield on 10-year Treasurys, 4.29% on election day and as high as 4.45% a week later, closed last week at just below 4.18%.

All in all, the signal from the three key variables is that things are calm despite inflation being stuck above the Fed’s target, and notwithstanding Trump’s threat of new tariffs to be imposed on significant trading partners. Investors still perceive the threat and the responses from foreign leaders as negotiating tactics and are unlikely to react until the threats become a reality, and a further reduction in Fed interest rates actually comes through.

The first steps by the various leaders has been understandably positive.

Canadian leaders responded to Trump by suggesting that border security is a major priority for their government. Prime Minister Justin Trudeau even paid a quickly arranged trip to Mar-a-Lago yesterday to meet with Trump. And after her initial threat of tit-for-tat tariffs, Mexico’s President Claudia Sheinbaum and Trump had a phone call that the US President-elect described as “a wonderful conversation.” The reception by foreign leaders could become markedly hostile, however, if the tariff increases are actually implemented by the next administration.

As SriKonomics discussed last week, risks remain of reduced trade flows, a stronger dollar, a higher gold price, and elevated Treasury and mortgage rates if the tariff increases do take place. Therein lies the political and economic threat to the next administration which won this month’s election by pointing to the 40-year high inflation prevalent during the Biden term.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

November 30, 2024

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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