Digest | 13 April 2025
- Edward von der Schmidt
- Apr 14
- 4 min read
Updated: 5 hours ago
A look at important themes on the horizon (April 14 - April 18).
The Week Ahead
AFTER/BEFORE THE STORM:
Reciprocal tariffs have been enacted and temporarily rescinded, although a broad-based 10% levy and many other tariffs (e.g. aluminum, steel, autos, "fentanyl-related") have taken effect. Penalty rates on Chinese imports already plateaued at levels precluding functional trade (145% on China, 125% on the US). Targeted exemptions for certain classes of electronics such as laptops and smartphones will grant limited reprieve to consumers. Details of special taxes on semiconductor-related imports are due this week, according to President Trump (or in the next two months, according to Commerce Secretary Lutnick).
Though the initial shock of "Liberation Day" may have subsided, uncertainty has not. Antagonistic rhetoric does not facilitate dialogue and negotiation; a trade war between the world's largest economies is fast becoming entrenched. Even if bilateral import tax rates have peaked, many countermeasures remain available and those in place are only beginning to filter through. Companies may be investigated or added to blacklists. The New York Times has reported that China will further restrict critical exports of rare earths and metals. The US may soon impose sector-specific tariffs for semiconductors as a Section 232 investigation highlights national security concerns. Latent tensions in the Indo-Pacific abound.
The US and China will exploit diplomatic channels to influence trading partners in a bid to gain leverage. While China's President Xi travels to southeast Asia on Monday to bolster regional ties after recent talks with European leaders, US negotiators will prepare for a trade envoy from Japan on Thursday. Discussions with a major trading partner and ally will give an indication as to the aims and cadence we might anticipate over a 90-day negotiating sprint, barring extension(s). The fruitfulness of these talks and degree of deescalation possible will determine the near-term economic trajectory, as will any repositioning away from US trade.
Recent yen weakness and the pace of Bank of Japan normalization may be a subject of talks between USTR Greer, Treasury Secretary Bessent, and Japan's Economy Minister Akazawa. That macro-financial considerations would figure so prominently reinforces the administration's broader view of trade barriers and what policies they believe are negotiable. If the White House welcomes dollar weakness to boost exports, however, how we get there matters. Depreciation would not be desirable if it were due to deteriorating domestic prospects. Time will tell.
DOLLAR DEBT:
Markets now fixate on Treasury trading. Longer-term government borrowing costs influence financial conditions and economic activity in myriad ways. They are also less subject to the Fed's policy controls, although emergency facilities and programs to attenuate market dysfunction can and have been fashioned quickly when required. Officials do not believe we are there yet. Where we are is in a rotation out of Treasuries and other US assets, but into what exactly? Record gold prices and foreign currency and equity out-performance (outside of Asia) offer anecdotal clues.
Generally in times of stress, US government debt has benefited from a perception of safety. Treasuries are nominally "risk-free" inasmuch as the US can print the money it requires to pay them back - debt-ceiling permitting. Of course, governments that inflate away their debt are penalized by lenders and voters. Burgeoning deficits outlined in proposed budget legislation will test the appetite for federal debt and the world's capacity to finance US consumption.
What will be more alarming than just a reallocation from US Treasuries and fixed income to other assets would be yields spiking as the dollar weakens. The latter could suggest a shift out of USD-denominated assets on account of diminished confidence in the US outlook, alongside concerns about growing debt and accelerating inflation. This type of Treasury sell-off might not compel Fed intervention (whereas widespread reserve manager selling or systemic de-grossing bordering on a crisis might), but it would bode poorly for growth and debt serviceability down the line.
DATA AND DISCIPLINE:
Coincident economic weakness and inflationary pressure would place the Fed's employment and price stability goals in competition, with conflicting prescriptions for monetary policy. Anticipatory surveys may augur trouble ahead, but current data do not yet reflect such a dire backdrop. Industrial production and retail sales reports for March due on Wednesday will be dated but offer a pre-tariff baseline. Regional Fed manufacturing surveys might shed some light on initial responses to "Liberation Day".
A host of Fed speaking engagements will continue to answer how policymakers feel about their modestly-to-moderately restrictive policy stance, given volatile trading, tariff unknowns, and the increased possibility of a recession. Last week's FOMC minutes and Fedspeak stressed the singular importance of keeping inflation expectations anchored. Expect more of the same public commitment to price stability in the service of both mandates, even if weaker growth and employment are anticipated.
Prior to appearances from Philadelphia Fed President Harker and Atlanta Fed President Bostic, Governor Waller will speak to the Economic Outlook on Monday. On Wednesday, Chair Powell will address the Economic Club of Chicago to discuss the Economic Outlook in a speech surely to offer important signals as to the thrust of monetary policy in the months ahead. Other Fed officials on the calendar include Governor Cook (Tuesday), Cleveland Fed President Hammack (Wednesday), Governor Barr (Thursday), and San Francisco Fed President Daly (Friday).
Good luck,
Edward von der Schmidt