Tariffs rolling in, but...

In his latest weekly insight, Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management. In this edition, he looks at the outlook for the US, NATO, and Europe.

Tariffs

Tariff revenues are rolling in, with the Treasury department recording $23 bn of receipts in May. This additional cost has been borne by businesses to this point, but it is widely expected that much of this will be passed onto consumers in the course of time. A weak dollar and higher oil prices may also compound the need to adjust prices related to import costs. Consequently, RBC BlueBay continues to see core CPI pushing towards 4% in the coming months, as this adjustment takes place.

Fed leadership

The Trump administration’s desire to see lower interest rates may also manifest in the suggestion that Treasury Secretary Bessent is being touted as a candidate for the Fed Chair. As an individual who has been eager to do Trump’s bidding, the idea is that Bessent would be more likely to deliver low interest rates with less of a focus on inflation risks.  However, even if he is nominated and subsequently confirmed by Congress, Fed policy decisions are made by Committee, and any sense that a Chair is pandering to political influence is likely to be strongly resisted by other governors around the table. That said, were Bessent to get the nod, RBC BlueBay would not be surprised that markets price a lower forward trajectory for Fed Funds and more likely a steeper yield curve, as a result.   

US-China trade

Representatives from the Chinese and US governments met in London this week, in order to shore up progress with respect to the ‘Geneva consensus’, which was thrashed out last month. It appears that the US has been pushing for progress, given its need to access rare earths and other critical minerals and this has put Beijing in a relatively strong negotiating position.  

Ultimately, it may seem that 30% tariffs will stay in place and this will limit US-China trade in the quarters to come. At this point, the battle ground seems to relate more to trans-shipments through third countries and US pressure on other nations to adopt a more restrictive stance towards China on trade. 

NATO summit

Suggestions coming from Italy this week, that they may only look to implement NATO spending goals on a 10-year view, appear to contradict messaging coming from Germany and Brussels, suggesting a much more rapid ramp-up in spending.  In part, this may reflect a desire from Italy and some others to push increased spending onto the EU, rather than the national budget. Nevertheless, the amounts being discussed are material and could have a major inference for forward-looking government bond supply. RBC BlueBay is inclined to think that markets are currently understating this and also the growth uplift, which may occur from this additional spending in the years ahead. This leaves the firm inclined to fade rallies in yields. 

US tech companies

RBC BlueBay thinks that reciprocal EU action could seek to target big US tech firms. However, on this point RBC BlueBay thinks that Trump is unlikely to be too troubled by EU action against woke Silicon Valley firms in the same way that it thinks that the EU is unlikely to lay everything on the line to protect Irish interests, noting that it took this position already when it came to Brexit.  Although an escalation of trade tensions could trigger renewed dollar weakness, RBC BlueBay would note that unlike the start of April when the market was positioned long of the dollar, this is now very much the other way round.