State Street: Tracking the impact of tarrifs

State Street: Tracking the impact of tarrifs

February 3, 2025

United States Politics Geopolitics
Trump (Photo credits TheDigitalArtist)

Tariffs are on. Now it is about figuring out who will pay the tariffs and what impact it will have on growth and inflation in the US and globally.

What will this mean for inflation and investor sentiment? Michael Metcalfe, Head of Macro Strategy at State Street Global Markets, identified four indicators to watch to get a read of the impact of the tariffs:

  • Prices of US Household equipment and furnishing – CPI sector both with high import content and high distribution margins, making the sector a good guide to actual pass through into consumer prices. These costs were already on a modest upward trajectory possibly in anticipation of tariffs.

  • Auto sector flows and holdings – Autos account for 11% of Canada’s and 22% of Mexico’s US exports, hence investors appetite for the sector would reflect their beliefs about the ability to pass higher prices to the consumer. Recent auction data suggest inflation pressures prior to the arrival of tariffs are relatively benign.

  • Flows and holdings into the equities of US retailers – There is already some evidence of investors becoming more defensive on US retailers despite robust consumer data in Q4. However, investors have spent much of the past year eliminating their underweight in autos. Investor flows in the coming weeks will serve as a good guide as to how long-term investors are viewing the potential for disruption to supply chains and pressure on margins. If flows don’t weaken, it could be taken as a sign that investors believe auto makers will be able to pass on the costs of the tariffs to consumers.

  • Long-term investors’ demand for TIPS relative to Treasuries – Relative demand for inflation protection has been higher since September by varying degrees. Watching how demand for TIPS evolves in the coming weeks will be a good gauge of how the actual implementation of tariffs impacts inflation views compared to initial expectations.

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