Tariff Terror
The Long-Dreaded Trump Tariffs unfolded at the beginning of April 
with rates that were in addition to current levels, making China’s over 50%. Of course we have to remember that these taxes assessed at the factory value, not at retail, so the impact is on the cost of the good, which is generally 10-30% of the final price that we see in the stores. The other portion of the store price is rent, transportation, theft, interest, depreciation, compensation and so on. Therefore, if Apple passed through 100% of the tariff on an iPhone, for example, then the store price would increase by about 15%. One time. Eggs are still 50% more than they used to be, in comparison, and so are many other items versus a few years ago. Monetary/Credit expansion is the real inflation generator, year after year, not a one-time tax increase (as unpleasant as that may be).
Tariff Revenue Partially Offsets The Budget Deficit which, if the projections are correct for $700-800 billion in incremental income, would cut the US government deficit by more than a third, lowering interest costs (and possibly rates, which would partially offset the tariff expense to the consumer). Also generally unnoticed in the sweeping new import tariffs was that energy commodities were excluded. The 10% baseline on all imports to the United States, and higher for many major trading partners, won’t apply to crude oil, natural gas and refined products. Lower energy costs translate into lower inflation risk. Steel, aluminum, gold and a long list of other industrial and precious metals also were not subject to “reciprocal” tariffs. Of course, Trump is well known for reversing himself (and re-reversing himself) so the revenue gains may not last but even so if in exchange for something else of economic value, then reserving judgement is warranted. Or at least putting off the wailing and gnashing of teeth until we see what the fallout is.
War: Ukraine-Russia
Ceasefire and Mineral Deals Remain Elusive, which should be of no surprise given that Russia is trying to expand its gains to as much territory as possible due to its weight in numbers. Ukraine in March had a mixed outcome – losing its salient in Kursk but pushing back Russia on the eastern front. Per NATO, 900,000 Russians have been either killed or wounded through February 2025, with about 35,000 in February alone, of which up to 250,000 have been killed since the war started over the three years ago. Putin’s spring conscription of 160,000 is slightly higher than 2024’s, underscoring the toll the war is taking on the young. Diplomacy is also living up to its “words, not deeds” as a supposed land ceasefire continued to be put off on Russian demands while a maritime ceasefire never got going. Trump even threatened Putin with additional tariffs and sanctions if his stubbornness continued, which so far it has. But Trump also complained about Ukraine procrastinating on the minerals deal. With Europe starting to step into the partial void of US military and intelligence aid, Trump’s leverage over Zelensky is shifting away from him. Germany’s parliament has approved Friedrich Merz’s plans to inject up to €1tn into the country’s military and infrastructure, and other countries are also spending on their militaries. Germany has even brought up reinstating the draft! With spring coming, Russia may instigate a new offensive – though they may not get far with their decimated equipment stockpiles.
Macro: Asia
China’s Trade Data for January-February Combined (as usual to avoid the impact of Lunar New Year spending timing) saw exports gaining +2.3% y/y in USD terms, missing market forecasts of +5.0%, reflecting escalating trade tensions and “tariff frontloading” last year by the US and Europe to receive shipments before tariffs came into effect – a wise plan in retrospect. Meanwhile, Chinese imports declined -8.4% y/y in the first two months of the year, missing market consensus of a +1.0% increase. This was the sharpest drop since July 2023 amid subdued domestic demand, among other factors. Chinese retaliatory tariffs as high as 15% on a range of US agricultural goods took effect in early March, ratcheting up the trade war between the world’s two biggest economies. Canada too was hit by similar tariffs. A greater risk to China is the elimination of duty free exports to the US of low-value packages (assessed at less than $800) in favor of a cost of 30% of their value or minimum $25 per item as of May 1st (increasing to $50 per item after June 1, 2025). With US Customs processing four million shipments into the US each day, what will the impact be to Amazon’s business?
China’s Other Economic Data covering January-February was weaker than a year ago as fixed asset investment grew +4.1% y/y, retail sales gained +4.0% y/y, and industrial production was up +5.9% y/y over the period. Meanwhile, the unemployment rate reached a two-year high at 5.4% as of February and electric generation fell by 1.3% y/y. The latest CCP stimulus plan was deemed insignificant and focusing on supporting minor consumption. Finally, China’s central government injected $72 billion into its major banks to keep them solvent and provide additional liquidity for possible new lending. We shall see.
Japan’s Trade Surplus with America Widened +29% last month from a year earlier, with auto shipments increasing almost +14%, again with the tariff-motivated
frontloading. Not just autos, but other Japanese companies were stockpiling goods in the US, according to a survey by Bloomberg News. Preliminary data from the Japanese Trade Union Confederation, known as Rengo, showed that 760 member unions secured wage increases of +5.46% on average this year. That is higher than last year’s +5.10% increase and the biggest rise since 1991. Interest rates as seen to the right will likely keep increasing.
Macro: US
With Tariffs Covered Above, US Budget negotiations are the next lurking villain with Treasury Secretary Bessent warning that the US will run out of “extraordinary” measures in May or June. With the House already passed a spending bill, the Senate looked to a similar budget blueprint extending previous tax cuts that are set to expire this year. The Federal Reserve in its March meeting held off on any interest rate changes, though it did decide to slow the decline in its US Treasury bond holdings, lowering the amount of US Treasury debt it allows to roll off its balance sheet each month from $25 billion to $5 billion beginning in April while the MBS run-off remains unchanged at $35 billion. With holdings of nearly $4.2 trillion worth of Treasury securities, one might reasonably wonder what the point of drawing down a measly $5 billion per month is. Unemployment ticked higher to 4.2% but the participation rate also increased. Underemployment moved a touch lower to 7.9%. US inflation fell more than expected to +2.8% in February with the core rate ticking down to +3.1%. Inflation expectations, likely exacerbated by relentless news articles on tariffs, moved higher from +4% to +5% over the next year. US factory output rose by the most in a year as a surge in motor vehicle production led a broader increase. Manufacturing output, which accounts for three-fourths of total industrial production, jumped +0.9% in February after a 
+0.1% gain the prior month. Pending Home Sales dropped -4.6% in January from the prior month, to an index level of 70.6, the lowest reading on record. Contract signings, a leading indicator for housing, have declined -44% over the last 3 years, posting the largest drawdown in history. Finally, the median household income necessary to purchase the median home for sale in the US ($124k) is 57% higher than the current median household income ($79k). Needless to say, this is an untenable situation. Housing payments as a percentage of income as the graph right shows also demonstrated the precarious situation of the consumer.
Macro: Europe
Eurozone Inflation Eased Further toward the ECB’s 2% target as prices rose +2.2% from a year ago
in March, down from +2.3% in February, Eurostat said. That matches the median estimate in a Bloomberg survey of economists. Services inflation – a particular focus for policymakers – moderated to +3.4% from +3.7%. The ECB cut its policy rate to 2.5% after lowering its GDP growth expectation to +0.9% for 2025. The main question is what the collective countries will do about the Trump tariffs – a response in kind was projected to cut growth to zero as consumers faced higher prices. Europe’s fragile reality continued to undermine their bravado. Soft power only goes so far.
All the best in your investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource