We were doing okay actually until just before 7 a.m. ET. Then came word that China is retaliating like-for-like against the new Trump tariffs. Now the Dow is down nearly 1200 points.
The irony is that we don't even export that much to China. But a new 34% tariff on those products will begin next Thursday, April 10th. China is also restricting certain imports of U.S. poultry and sorghum, and restricting their exports of rare earth elements. "CHINA PLAYED IT WRONG, THEY PANICKED - THE ONE THING THEY CANNOT AFFORD TO DO!" President Trump responded on Truth Social.
Investors are also panicking--even more so in China than here. Chinese stocks had been on a tear this year, but the KWEB internet ETF is down 10% today, and 20% from its highs just two weeks ago. The large-cap FXI is down 8%. Alibaba is down 13%. In other words, Chinese stocks are doing worse today, on their own retaliatory measures, than they did in response to the president's actual new tariffs.
Some think the panic is overdone. A friend of ours is a local sportswear retailer whose apparel is made in China. "We could choose to absorb [the tariffs], or not, depending on what we think our customers will accept," he said. He said for higher-end retailers--the Lululemons of the world--even a 54% tariff may not have that huge of an impact. "Their costs on a $100 item may go from $8 to $13, you think they can't absorb that?"
But other items might see a bigger impact. Peter Baum told us yesterday the new tariffs will put him out of business. "We started moving our supply chains out of China in 2019, on the president's advice, and into Cambodia and Vietnam. Now there's nowhere left to go," he said. He makes lower-end items, like baskets and beach umbrellas, for name-brand retailers. "That beach chair that used to cost $29.99 will cost $64.99 now," he told us.
It could be a similar story for electronics. The tariffs on China and Taiwan "[will] cause every electronic to go up 40-50% for consumers," Wedbush's Dan Ives wrote. "iPhones made in the U.S. would cost $3,500," up from $1,000, he reckons.
I think the two biggest questions now are what will the U.S. do with the tariff revenue, and what will the Federal Reserve do. Given that consumers are facing the biggest de facto tax hike since 1968, according to J.P. Morgan, recycling some of that revenue in the form of tax cuts would certainly take the sting out--but such plans remain vague at the moment.
And as for the Fed, we'll coincidentally hear from the Fed Chair himself this morning in a speech that now will take on huge significance. On the one hand, he could hint that the Fed stands ready to help in the case of a slowdown. The market is already there, expecting four or even five rate cuts this year (the 10-year yield has fallen to 3.9% this morning!).
On the other hand, the economy came into this tariff shock with much more momentum than expected. The jobs report earlier this morning showed we added a whopping 228,000 jobs last month, even with an already cautious consumer and with "DOGE" in full force cutting government payrolls. If the "bark" turns out to be worse than the near-term bite of tariffs, the Fed may have to stay put.
With all of this so uncertain and unprecedented, it probably argues for the Fed to be cautious--even as some are already calling for emergency rate cuts. Let's see how Chair Powell is thinking about it.
See you at 1 p.m!
Kelly
