Just how much depends on many moving parts, not least the longevity of the tariffs, the targets, and the foreign retaliation. Needless to say, this makes the impact very difficult to quantify. But what we may find is that the market becomes much more sensitive to any sign in the data that growth might topple and/or inflationary pressure rise as a result of tariff concerns. This growth-or-inflation debate could be key to determining how financial markets are likely to move.

Most analysis suggests that US tariffs will lower growth and lift inflation. For instance, the Peterson Institute estimates that US GDP could be around USD 250 billion lower by the end of Trump’s term than it would otherwise be if 25% tariffs are put on Canada and Mexico in addition to the 10% on China.

Other analysis suggested that US inflation would be up to half a percentage point higher this year as a result of the tariffs. Different analyses of tariffs might produce different metrics, but the basic message of weaker US growth and higher inflation is a pretty consistent one. It is also one that stands to reason even for those without the benefit of econometric models.

While we don’t know for sure what tariffs will be introduced, against whom, and for how long, let alone all the retaliatory action that could be taken, this won’t stop the market from poring over the data to see if there are any signs of pressures emerging already. Of course, at this early stage we would not expect 'real’ data to be materially impacted, so instead, it will be survey data that’s watched as the market tries to determine just whether the growth or inflation effect will dominate. If weakness in growth is seen to be more prevalent, we are likely to find that bond yields decline and the dollar eases back.

However, if upside inflation threats are revealed by survey data, bond yields would likely rise alongside the dollar. So, what will it be? Again, it is not easy to determine any likely ordering here... except for the fact that we do have a model from Trump’s first term that we can use.

In the Standard Bank’s view, the most relevant comparison with Trump’s first term is not the start of his presidency in 2017. That’s because clear tariff threats and tariff actions did not start until the period between March 2018, when he first threatened China with tariffs, and July of that year when the first tariffs were introduced. Of course, Trump did introduce some tariffs before March in 2018 but these were on specific products such as solar panels. The broad tariffs did not start until July 2018 and, as growth expectations seemed to be the first casualty, not concerns about higher prices. Here we’ve used US survey data in the shape of the ISM index for the manufacturing sector, both in terms of the overall survey, for hints about future growth, and the price paid component for signs of higher inflation. 

What we saw in the wake of Trump’s tariffs in mid-2018 was a steep fall in the ISM index.  For at the time Trump started to make his threats towards China on tariffs the ISM index was close to 60 but, little more than a year later it was under 50 and the prices paid index also fell over the period. This weakness prompted the Fed to turn a tightening cycle in 2018 into an easing cycle in 2019 (under much pressure from President Trump, it has to be said).

Now undoubtedly, there are lots of caveats in such a simple analysis. For instance, we have only spoken about one survey measure here, the ISM survey. In addition, the economy was in a different place back then to today, and other forces—like Fed hikes – stand out as being different to today, where the Fed is easing. Hence we are not saying for one second that we will see a carbon copy of events 7-8 years ago. Nonetheless, we stick by the idea that if survey data and possibly some real-side data are going to show early sensitivity to all this tariff furore, it is more likely to be in terms of softer growth than higher inflation and that, in turn, could press down on the US dollar and bond yields.