Back to Panic Mode as U.S. Reciprocal Tariffs Take Effect and China Strikes Back

April 9, 2025

The U.S. tariff on China is now 104%, and China’s government has answered with an 84% levy on imports of U.S. goods.

An editorial in yesterday’s NYT by University of Chicago economics professor Brent Neiman, whose collaborated work with three other economists had been cited by the U.S. Trade Representative office as one basis for the methodology used by the Trump Administration for assigning its new tariff levels, claims “the White House mangled my research to justify those insane tariffs” and at a minimum “should divide its results by four.”

President Trump shows no sign of backing down from his position on tariffs in spite of some public wavering by Elon Musk and other supporters. Neither do the Chinese or Europeans, creating a perfect storm for an escalating trade war with only losers and no winners.

In overnight financial market action,

The price of oil, dived over 5%, bringing its drops to 25% since April 3rd and 30% since this year’s high in mid-January.
Investors continued to reduce dollar holdings, depressing the greenback by 1.0% against the yen and Swiss franc and 0.8% versus the euro and sterling. The euro got as strong as $1.089, 8.5% above its mid-January low and near its strongest level since early October.
Bitcoin traded half a percent lower and a tad over 30% softer than its post-U.S. election high of $109,225.
Long-term U.S. treasuries, another traditionally favored safe haven, also got punished. The 30-year Treasury yield got as high overnight as 4.98% versus 4.42% five days ago and 3.93% in mid-September. The 10-year Treasury yield’s leap of 12 basis points today compares with a 1-basis point uptick in the comparable German bund yield and no change in the 10-year Japanese JGB.
Among key U.S. stock indices in pre-open futures trading, the SPX, DOW, and Nasdaq have lost over 1.0%, and the Russell 2000 shows a drop of slightly more than 2.0%.
Major stock markets in other major countries have fared even worse, with relative declines aligning more or less with the extent of reciprocal tariffs imposed by the United States. The Swiss Market Index (SMI), for instance, is down 4.8% so far today, and the exchanges in Germany, France, Italy Spain and Great Britain all show losses exceeding 3.0%. In the Pacific Rim, stock markets this Wednesday fell by 5.8% in Taiwan, 4.2% in Vietnam, 3.9% in Japan, 2.6% in Singapore, 1.8% in Australia, 1.7% in South Korea, but up by 1.3% in China where the government has been lending direct support.

Central Bankers are taking notice of the rapidly darkening world trade situation. A speech given by Bank of Japan Governor Ueda, whose Board is scheduled to review policy next at the end of this month, maintained the broad guideline that further hikes of the short-term central bank interest rate will be forthcoming if growth and inflation unfold in line with the BOJ’s projected paths, but he hedged on the immediate policy prognosis by favoring a pause until officials can better discern the impact of rising tariffs.

Central bank officials in India and New Zealand, in widely expected moves, cut their key interest rates by 25 basis points today. The Reserve Bank of India‘s unanimously decided repo rate reduction to 6.0% followed a similar cut made at the prior February meeting and a two-year period before that with the rate maintained at a peak of 6.5%. The required reserve ratio was left unchanged today at 4.0%. In the RBI’s released statement announcing today’s decision, officials assert “greater confidence of a durable alignment of headline inflation with the target of 4 per cent over a 12-month horizon” but goes on to acknowledge that “uncertainties remain high in the wake of the recent spurt in global volatility” and to conclude “in such challenging global economic conditions, the benign inflation and moderate growth outlook demands that the MPC continues to support growth” and to “change its policy stance from neutral to accommodative.”

At the Reserve Bank of New Zealand where the Official Cash Rate had peaked at 5.5% from May 2023 until an initial cut last August, officials have now sliced two full percentage points from that very restrictive level. New Zealand consumer price inflation has receded from 7.3% in the second quarter of 2022 to 2.2% in the second half of 2024, and officials are confident that inflation will stay near 2% for the coming year.

With CPI inflation close to the mid-point of the target range, significant spare capacity in the economy, and a weaker activity outlook stemming from global trade policy, the Committee agreed that a further reduction in the OCR was appropriate. As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate.

In other news today, the CDU/CSU and SPD parties of Germany have reached full agreement to form a government with Merz as the next Chancellor. He favors lifting the deficit brake on government spending and in particular a heavier military defense buildup. China’s premier Li said that ample policy tools will be used to assure continuing economic growth in spite of higher tariffs. Deputy Bank of England Governor Lombardelli warned that higher tariffs will depress British growth but said their net effect on inflation is less clear.

Among reported data, a drop last week in the U.S. 30-year fixed mortgage rate to a 24-week low of 6.61% incentivized mortgage applications to jump 20.0% last week, more than reversing a cumulative 9.5% drop over the three prior weeks.

Japanese consumer confidence weakened to a one-year low in March. The has been lower than 40.0 since May 2019 and printed last month at 34.1 versus 34.8 in February. Japanese machine tool orders in March were 11.4% above a year earlier, their largest on-year advance in 3-months.

Norwegian producer price inflation fell to a 3-month low of 11.5% in March from a 29-month high of 23.3% in February. Lithuanian producer price inflation, which imploded from 33.7% in June 2022 to -9.4% one year later, printed at a two-month low of -1.5% in March. That was the seventh sub-zero result in the last eight months. And in Brazil, PPI inflation, which had accelerated from -14.0% in July 2023 to a 28-month high of 9.7% this past January, dipped to a 2-month low of 9.4% last month.

Mexican consumer price inflation edged marginally highr to a 3-month high of 3.8% in March but remained near January’s 3-year low of 3.6% and near the Bank of Mexico’s 4.0% target.

A 1.5% year-on-year rise in Brazilian retail sales during February was the smallest advance in 14 months.

Investor attention next turns to the release of the FOMC minutes from its last policy meeting, which are due today at 14:00 EDT.

Tags: Reserve Bank of India, Reserve Bank of New Zealand, tariff war developments

This entry was posted
on Wednesday, April 9th, 2025 at 6:42 am and is filed under New Overnight Developments Abroad – Daily Update.
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