In short
U.S. tariff escalation and market impact, focusing on how tariffs may rise tactically during negotiations and what that means for growth, bonds, and equities.
Guests
No external guests. Host is Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.
Key claims
Tariffs are in “tactical escalation,” likely rising but staying below earlier April fears (25–30%). Announced hikes could move tariffs toward 15–20% (from ~13% to ~15% expected). Effects may be lagged by months. Higher tariffs pressure U.S. growth but are not enough to derail an equity rally; bond yields may move lower, supporting bond returns.
Notable examples
Vietnam and Japan tariff hikes; copper; large-cap exposure via China, Canada, Mexico, and the EU; negotiations with Mexico/Canada/Europe/China; China semiconductor/rare earth deal briefly reducing triple-digit tariffs.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOUnderstanding Current U.S. Tariff Policy
0:16 to 1:12
Discussion on the recent increases in U.S. tariffs and their implications for investors.
“trade policy, with tariff increases announced across many nations.”
Impacts of Tactical Tariff Escalation
1:12 to 2:39
Analysis of how increased tariffs affect U.S. growth and market dynamics.
“administration is still focused on reducing goods trade deficits and may not yet perceive there to be substantial political and economic risk of tariff escalation.”
Negotiations and Future Considerations
2:39 to 3:23
Exploration of the potential implications of negotiations with major trading partners.
“In our view, tariffs with these partners are likely to land near current levels, but the path to get there could be volatile.”
Transcript
Automatic transcript. May contain errors.0:00Michael Zezas:Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. Today, the latest on U.S. tariffs and their market impact. It's Thursday, July 10th at 12.30 p.m. in New York. It's been a newsy week for U.S. trade policy, with tariff increases announced across many nations. Here's what we think investors need to know. First, we think the U.S. is in a period of tactical escalation for tariff policy, where tariffs rise as the U.S. explores its negotiating space, but levels remain in a range below what many investors feared earlier this year. We started this week expecting a slight increase in U.S.
0:41Michael Zezas:tariffs, nothing too dramatic, maybe from 13 % to around 15%, driven by hikes in places like Vietnam and Japan. But what we got was a bit more substantial. The U.S. announced several tariff hikes set to take effect later, allowing time for negotiations. If these new measures go through, tariffs could reach 15 to 20 percent, significantly higher than at the beginning of the year, though far below the 25 to 30 percent levels that appeared possible back in April. It's a good reminder that U.S. trade policy remains a moving target because the U.S. administration is still focused on reducing goods trade deficits and may not yet perceive there to be substantial political and economic risk of tariff escalation.
1:23Michael Zezas:Per our economists' recent work on the lagged effect of tariffs, this reckoning could be months away. Second, the implications of this tactical escalation are consistent with our current cross-asset views. The higher tariffs announced on a variety of geographies and products like copper put further pressure on the U.S. growth story, even if they don't tip the U.S. into recession, per the work done by our economists. That growth pressure is consistent with our views that both government and corporate bond yields will move lower, driving solid returns. It's also insufficient pressure to get in the way of an equity market rally in the view of our U.S.
2:00Michael Zezas:equity strategy team. The fiscal package that just passed Congress might not be a major boon to the economy overall, but it does help margins for large-cap companies, who, by the way, are more exposed to tariffs through China, Canada, Mexico, and the EU, rather than the countries on whom tariff increases were announced this week. Finally, how could we be wrong? Well, pay attention to negotiations with those geographies we just mentioned, Mexico, Canada, Europe, and China. These are much bigger trading partners, not just for US companies, but the US overall. So meaningful escalation here can drive both top-line and bottom-line effects that could challenge equities and credit.
2:39Michael Zezas:In our view, tariffs with these partners are likely to land near current levels, but the path to get there could be volatile. For the U.S., Mexico, and Canada, background reporting suggests there's mutual interest in maintaining a low tariff block, including exceptions for the product-specific tariffs the U.S. is imposing. But there are sticking points around harmonizing trade policy. The dynamic is similar with China. Tariffs are already steep, amongst the highest anywhere. While a recent narrow deal around semiconductors and rare earths led to a temporary reduction from triple digit levels, the two sides remain far apart on fundamental issues.
3:15Michael Zezas:So when it comes to negotiations with the US's biggest trading partners, there's sticking points. And where there's sticking points, there's potential for escalation that we'll need to be vigilant in monitoring. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review. And tell your friends about the podcast. We want everyone to listen. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
The ultimate market outcomes of President Trump’s tactical tariff escalation may be months away. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas takes a look at implications for investors now.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. Today: The latest on U.S. tariffs and their market impact.
It’s Thursday, July 10th at 12:30pm in New York.
It's been a newsy week for U.S. trade policy, with tariff increases announced across many nations. Here’s what we think investors need to know.
First, we think the U.S. is in a period of tactical escalation for tariff policy; where tariffs rise as the U.S. explores its negotiating space, but levels remain in a range below what many investors feared earlier this year. We started this week expecting a slight increase in U.S. tariffs—nothing too dramatic, maybe from 13 percent to around 15 percent driven by hikes in places like Vietnam and Japan. But what we got was a bit more substantial.
The U.S. announced several tariff hikes, set to take effect later, allowing time for negotiations. If these new measures go through, tariffs could reach 15 to 20 percent, significantly higher than at the beginning of the year, though far below the 25 to 30 percent levels that appeared possible back in April. It’s a good reminder that U.S. trade policy remains a moving target because the U.S. administration is still focused on reducing goods trade deficits and may not yet perceive there to be substantial political and economic risk of tariff escalation. Per our economists’ recent work on the lagged effects of tariffs, this reckoning could be months away.
Second, the implications of this tactical escalation are consistent with our current cross-asset views. The higher tariffs announced on a variety of geographies, and products like copper, put further pressure on the U.S. growth story, even if they don’t tip the U.S. into recession, per the work done by our economists. That growth pressure is consistent with our views that both government and corporate bond yields will move lower, driving solid returns. It's also insufficient pressure to get in the way of an equity market rally, in the view of our U.S. equity strategy team. The fiscal package that just passed Congress might not be a major boon to the economy overall, but it does help margins for large cap companies, who by the way are more exposed to tariffs through China, Canada, Mexico, and the EU – rather than the countries on whom tariff increases were announced this week.
Finally, How could we be wrong? Well, pay attention to negotiations with those geographies we just mentioned: Mexico, Canada, Europe, and China. These are much bigger trading partners not just for U.S. companies, but the U.S. overall. So meaningful escalation here can drive both top line and bottom line effects that could challenge equities and credit. In our view, tariffs with these partners are likely to land near current levels, but the path to get there could be volatile.
For the U.S., Mexico and Canada, background reporting suggests there’s mutual interest in maintaining a low tariff bloc, including exceptions for the product-specific tariffs that the U.S. is imposing. But there are sticking points around harmonizing trade policy. The dynamic is similar with China. Tariffs are already steep—among the highest anywhere. While a recent narrow deal—around semiconductors for rare earths—led to a temporary reduction from triple-digit levels, the two sides remain far apart on fundamental issues.
So when it comes to negotiations with the U.S.’ biggest trading partners, there’s sticking points. And where there’s sticking points there’s potential for escalation that we’ll need to be vigilant in monitoring.
Thanks for listening. If you enjoy Thoughts on the Market please leave us a review. And tell your friends about the podcast. We want everyone to listen.