29 November 2024: How exposed is the economy to Trump’s tariffs?

The “Special Relationship” between the UK and the U.S. stretches beyond intelligence gathering and security, mutual defence treaties and NATO membership. Furthermore, the cliché that the countries are “nations divided by a common language” perfectly illustrates the bond between the two.

The royals, high tea, and Downton Abbey are among the “quant traditions that form “must-dos for visitors from “across the pond.”

However, Americans also love British pharma, chemicals, and Range Rovers, leaving the UK more exposed to Donald Trump’s tariff threats than other European countries.

According to data from the McKinsey Global Institute, the US is the No. 1 destination for nine out of 15 British categories of exported goods. By comparison, Germany has four sectors where the US is the main buyer, while France has only one.

The Prime Minister may well feign indifference to Trump’s threats, but the President-elect will always be his first call when wanting to discuss developments in global security.

The US may be the UK’s largest individual trading partner, with imports and exports totalling £300 billion annually, but almost 70% of that comes from banking, consulting and other tradeable services not usually envisioned as tariff targets and not likely to be included when Trump finally confirms that he is targeting manufactured goods.

British manufacturing is dominated by a handful of mammoth goods makers, this is much the same as a handful of companies which have “hijacked” U.S. equity markets.

Imposing tariffs on the country’s goods would hit large companies that employ 1 million people and generate the bulk of the manufacturing sector’s £68-billion turnover. Jaguar Land Rover derives a quarter of its revenue from the US, while AstraZeneca’s 42% relies on the American market for its sales.

The UK sectors relying most on the US, pharmaceuticals, medical and scientific instruments, machinery and transport equipment, are the ones that are most likely to be tariff targets.

The Government would do well to be prepared rather than sleepwalking into another significant threat to the economy.

Net migration figures were published yesterday, and they showed that there was yet another “black hole” in the data. It seems that that black hole is the size of the population of Gloucester, 166k.

Sir Keir Starmer seized on the figures, which cover a period before Labour took office, to accuse the Tories of “running an open borders experiment”. Successive Conservative Prime Ministers, from David Cameron to Rishi Sunak, promised that net migration would be in the tens of thousands, but they have patently failed. Only around 3% of migration is illegal, including the headline-grabbing concentration on “small boats”.

Conservative leader Kemi Badenoch has said her party got its migration policy “wrong” and she pledged to set a “strict numerical cap”, although she has yet to commit to a number.

Reform UK leader Nigel Farage called the latest figures “horrendous”, and he had had “enough of being lied to” by the Conservatives. The numbers would be “even worse” under Labour, he added.

With U.S. markets closed for the Thanksgiving Holiday, Sterling continued its relative strength despite a lack of both liquidity and interest from traders. It rose to a high of 1.2691 and closed at 1.2687.

While the markets concentrated upon consumer spending as the main driver of the 2.8% rise in GDP between July and September, one of the other significant contributors was exports, which increased at a 7.5% annualised rate, the strongest growth in two years.

Offsetting those gains was a decline in business investment, which slowed sharply on a drop in investment in housing and non-residential buildings such as offices and warehouses.

Additionally, unemployment in the U.S. remains low at 4.1% and inflation has fallen from a peak of 9.1% in June 2022 to 2.6% today.

Rising exports may well be hit by any retaliation by America’s trading partners, outside the “big three”, Canada, Mexico and China, although the Chinese reaction will be key.

In October 2023, China held approximately $1 trillion in U.S. Treasury securities. However, this figure can fluctuate due to several factors, including changes in U.S. government borrowing, China’s economic policies, and global market conditions.

Should they decide to ask the U.S. to pay more to borrow what is an eye-watering sum, it could blow not just the U.S. economy off course but have serious repercussions for global interest rates.

Trump will inherit a mostly healthy economy when he takes office in mid-January. However, he is likely to want to make his mark to be able to point to his influence when his first 100 days are up.

The Fed’s preferred inflation gauge rose as expected in October, showing that prices increased 0.2% from September and 2.3% annually. The year-on-year increase is a slight uptick from September’s annual PCE figure of 2.1%.

Core PCE, which excludes volatile food and energy prices, came in 0.3% higher month over month in October and 2.8% higher annually. It’s the highest annual core PCE reading since April. In the 12 months to September, core PCE increased 2.7%.

The Fed is on record as being interested in a wide range of factors and will not concentrate on just inflation and employment, which are the main factors in its mandate. The November employment report is due a week from today and will doubtless offer trading opportunities next week.

The next FOMC meeting is scheduled for December 17/18 and will be the first for three months not to be held during “exceptional circumstances. The July meeting, which saw the Fed Funds rate cut by fifty basis points was held before the release of the July employment report, which was the third highest on record, while the November meeting was overshadowed by the election. The September meeting was held in relatively “calm conditions” and rates were left unchanged.

While the turkeys were being carved and potatoes mashed yesterday, traders in other centres decided to sit back and contemplate what was in store for the rest of the year and the first quarter of 2025.

The dollar index attempted to break higher, influenced by day traders, but those same traders quickly took profits, leaving the index to close just nine points higher and 106.16.

ECB Governing Council members appear to be getting cold feet about the prospect of a rate cut at every meeting between December and next June. While the markets have been introduced to the idea of a fifty-point cut next month, Isabel Schnabel and Robert Holzmann, two notable hawks, have “pressed the reset button.

Schnabel spoke during an interview with Bloomberg of the fact that there is no urgency for interest rates to reach accommodative territory while inflation is still a threat.

Her pushback against a 50bp rate cut in December has helped market pricing for that meeting move in from 38bp last week to 28bp yesterday.

Should the ECB “only” cut by twenty-five points at its December meeting, it may lead to a correction for the Euro, although there are several other factors in play. The Fed is also likely to leave rates on hold, which would contribute to further divergence in monetary policy, while traders will be wary of developments in French politics.

Marine Le Pen’s faction may well pull the plug on Michel Barnier’s government next week over a budget vote. The French-German sovereign 10-year sovereign bond spread has widened to levels last seen in 2012, which is worrying for the euro and a reminder that any chance of fiscal support from either France or Germany is remote.”

Schnabel and ECB Chief Economist Philip Lane are often considered to be “two sides of the same coin”, however, Lane has recently become a little more concerned about growth and how any recession could well be deep and long-lasting.

However, he is also not thought to be in favour of a fifty-point cut next month, although he seems to be prepared to be persuaded as the most recent data has pointed to a steep downturn.

As the ECB steers a path towards its neutral rate which is thought to be at 1.75% those members of the Governing Council who had made dovish pronouncements appear to be concerned that deflation appears to have slowed.

Lending to the private sector increased in October at a steady pace, data published by the European Central Bank showed on Thursday.

Adjusted loans to the private sector grew 1.6% year-on-year in October, unchanged from the previous month.

Among borrowing sectors, annual growth in loans to households rose at a slightly faster pace of 0.8% after a 0.7% gain. Likewise, loans to non-financial corporations climbed 1.2%, slightly faster than the 1.1% rise a month ago.

The data show two opposing views. First, lending is still rising which does not point towards stagnation, but the lending levels show that more needs to be done to promote intra-EU business which is still struggling.

The euro is at a crucial level for its short-term progress. It has reached 1.0575 for the last three sessions but appears to be unable to advance any further. A close below that level today will be considered negative in the medium term.

Have a great day!