Central Banks, Tariffs, Market (Weekly post 07-11/April)

Before we dive in…
Geopolitical context,
Tariff war, World re-polarization, from off-shore to friend-shore,
Emerging deflationary concerns on the horizont.

CDS Index:

Gold Futures:

I can’t stress enough that the market not only hasn’t come out of the woods yet, it has only just entered it.
We reached a bottom here, and we’ll see vol selling to brake that car on the icy road. In this environment, any not-bad news is good news. But the underlying trend is still bearish until fiscal and negotiation outcomes change the picture.
Trump wants to push through tax cuts and a debt ceiling increase; if they fail, the U.S. is likely to plunge into a quick recession. But the elite and the banks and funds have every tool to bail the economy out.
As I keep saying, the real reason behind the tariffs is that Trump’s strategy is to force the EU and other affected nations to the negotiation table. Some countries have already started negotiating. And with Klaus Schwab stepping aside, there may be an opportunity for a reformed approach—one that might be ready to engage with the U.S. on more favorable terms, as part of a broader realignment that acknowledges the limits of pure globalization.
(Schwab was a long-time symbol of the globalist elite—the network of business and policy leaders who traditionally guided global economic policy and multilateral cooperation. With this move, the globalist elite, recognizing the need to adapt to a new reality, might be more willing to consider U.S. proposals that align with the current economic and geopolitical landscape.)

The current situation requires a lot of patience, because these events all hinge on the decisions of leaders. Predicting them in advance isn’t worthwhile—it can create unnecessary bias. Here, we must watch, wait, and adapt.

This is what Powell said on Friday. Doesn’t it sounds familiar? (hint: my premarket post)
And what did Trump say?

Let’s break it down…
The new tit-for-tat “tariff war” initiated by the U.S. is reshuffling the global trade deck. Let’s first identify which countries and sectors are most exposed to the U.S. trade balance and thus in the crosshairs of tariff policy, and how they are responding.

China is by far the largest source of the U.S. trade deficit (goods deficit with China was about $350-400 billion per year pre-tariffs), China is the prime target.
The U.S. tariffs (now averaging 34% on Chinese good) hit electronics, machinery, furniture, and other consumer products. China’s exposure to U.S. demand is significant – around 18% of China’s goods exports went to the U.S. pre-tariff. The immediate impact is disruption of supply chains. Multinational companies with factories in China (toys, apparel, consumer electronics) are scrambling to reroute orders to other Asian countries or domestically in the U.S./Mexico. As a result, beneficiaries include Vietnam, Mexico, and other Southeast Asian nations which can supply similar goods. Indeed, even before this escalation, Vietnam and India saw rising U.S. imports as firms “China+1” strategy took hold. Now that will accelerate.
However, as CSIS notes, the scale and scope of Trump’s new tariffs exceeded expectations – he didn’t stop at China.

NAFTA (now USMCA) partners traditionally enjoy tariff-free access to the U.S. market. But Trump invoked a “reciprocal tariff” doctrine even on allies – threatening 25% tariffs on Canada and Mexico for any sectors where they impose barriers.
Specifically, he complained about Canada’s dairy protections and Mexico’s auto rules. This is politically sensitive because USMCA is in force. Mexican officials have warned that U.S. tariffs violate the agreement and have prepared retaliatory tariffs on U.S. corn and machinery if enacted.
Mexico is highly exposed: it’s the U.S.’s second-largest trading partner, with a deficit of around $130B. Sectors at stake: autos and auto parts (huge cross-border industry), electronics, appliances, and agriculture (Mexico imports a lot of U.S. grain, and exports vegetables and beer).
So far, Trump gave a short reprieve to USMCA partners to negotiate. The hope is he’s using the threat as leverage to force, say, more U.S. content in autos or a sunset clause renegotiation. If he actually slapped tariffs, it would be economically damaging to border states and U.S. companies integrated with Mexico. Thus, we may see intense negotiations where Mexico perhaps agrees to quotas or voluntary export restraints in some sectors to appease Trump. Canada, too, may make concessions (e.g. further opening its dairy market, as it partially did in USMCA).
The “coalition of the willing” in trade might ironically be U.S. neighbors trying to appease U.S. demands. Canadian and Mexican leaders are also coordinating with the EU and Asia to form a united front at the WTO, but the WTO’s Appellate Body is defunct (partly due to U.S. blocking), limiting legal recourse.

The EU as a whole runs a trade surplus with the U.S. (~$200B in goods, partly offset by a U.S. surplus in services).
Germany is a major contributor via cars and machinery. The new U.S. tariffs hit European autos with a 10% duty (since the EU has a 10% tariff on U.S. cars, Trump mirrored it – “reciprocal”) and steel/aluminum with 10% (again citing existing EU tariffs). The EU swiftly announced it would “give as good as it gets” with proportionate tariffs. Brussels targeted iconic American exports like Harley-Davidson motorcycles, Kentucky bourbon, and even iPhones (the $2,300 iPhone quip – that’s an estimate of future cost if all tariffs fully applied). Europe’s strategy is twofold: retaliate to pressure the U.S. politically, but also seek dialogue. EU Trade Commissioner has flown to Washington to propose a plurilateral forum on tariff reduction, trying to coax the U.S. back to a negotiated solution.

Both Japan and South Korea have large trade surpluses with the U.S. in automobiles, electronics, etc. Japan’s surplus (~$70B) has long irked Trump. He revived talk of a 25% auto tariff, which would hit Toyota, Honda, etc.
Japan is extremely exposed in autos – millions of cars exported. However, Japan’s strategy is to emphasize its investments in U.S. factories (many Japanese carmakers build in America, employing tens of thousands).
South Korea renegotiated KORUS FTA with Trump in 2018 to avoid tariffs by limiting steel exports and opening auto quotas. They’ll likely abide by those terms and hope to dodge new tariffs.
Both Japan and Korea are also key players in semiconductor and battery supply chains – ironically, sectors the U.S. wants to secure. So tariffs there could be self-defeating. We might see sectoral exemptions – e.g. rare earths, EV batteries, etc., might be spared due to strategic importance.

Vietnam, Taiwan, Thailand and Malaysia have seen surging exports to the U.S., partly taking share from China.
Vietnam now has a >$100B surplus with the U.S., making it potentially the next target. The U.S. has already labeled Vietnam a currency manipulator in the past. However, Vietnam is a linchpin of U.S. Indo-Pacific strategy – it’s a communist country but leans toward the U.S. to counter China.
The pattern could be: hammer China publicly, quietly negotiate with Vietnam/others to not let them become too big of conduits for Chinese goods. Countries like Vietnam and Malaysia will attempt to comply with rules of origin, to show they aren’t just repackaging Chinese products. If they succeed, they gain as trade diverts to them. If the U.S. also targets them, then the whole global trade pie shrinks substantially (a true Smoot-Hawley scenario).

Some countries run deficits with the U.S. (meaning U.S. has surplus). They include UK, Netherlands (due to services and trans-shipments), and some in Latin America. Those countries are less exposed to tariffs, but more exposed to slowdown in U.S. demand. For example, if U.S. consumers pay more for tariffs, they may import less from everywhere, not just tariffed countries. So even nations not directly hit by tariffs might suffer collateral export declines.

We also see a quickening of the “reconfiguration of supply chains” that began with Covid-19 and U.S.-China economic cold war tensions.
There’s a push for “friend-shoring” – sourcing from countries deemed friendly to the U.S. (like Mexico, or maybe India). Southeast Asia stands to benefit: Thailand might get more electronics assembly, Indonesia more furniture/textile orders, etc. U.S. domestic manufacturing could see a boost in certain sectors (steel, perhaps semiconductors with CHIPS Act support, etc.), but capacity constraints and higher costs mean it can’t replace Asia overnight.

One sector to watch is agriculture.
China’s retaliation so far focused on manufactured goods tariffs, but if it extends to U.S. agriculture (like soybeans as in 2018), it could hurt U.S. farmers and cause trade diversion to Brazil/Argentina for soy, or Australia for grains. On April 4, China did announce tariffs on all U.S. goods including agri, which implies U.S. farmers will indeed face losses as Chinese buyers shift to South America. That puts political pressure on Trump from farm states, which might force some compromise or subsidies to farmers (like the aid given in 2019 trade war).

The Fed is a bit behind the ECB in dovish pivot but is moving that way.
Powell’s comments acknowledging tariffs’ impact on inflation and growth show a balanced view.
The Fed’s reaction function now weights financial conditions more because the banking system had a scare in 2023 (Silicon Valley Bank and others). The Fed doesn’t want to inadvertently trigger more bank failures or market crashes by overtightening. The tariffs complicate their job: they could add maybe 0.5% to headline inflation later in 2025 (if companies pass costs on), but also subtract perhaps 1% from GDP over 2 years (as global trade shrinks).
The bond market is betting the Fed chooses to support growth (cut rates) rather than fight a one-off inflation blip.
We can expect the Fed start cutting by Q3 2025. It will also use tools to ensure liquidity – e.g. extending the BTFP (which lends to banks against bonds at par, essentially QE-like support). The Fed’s big concern is un-anchored inflation expectations, but so far long-run inflation expectations have remained around 2-2.5% (helped by the credibility they built).

The ECB’s typical reflex (as seen) is early easing on growth fears.
The ECB has explicitly said a trade war is a big downside risk and that inflation from tariffs will likely be short-lived, whereas the growth hit could be lasting. That gives them cover to cut rates without worrying they are betraying their inflation mandate – because they expect inflation will actually fall after an initial import cost bump (due to recessionary forces).
We saw multiple ECB officials make the case for cuts in March. We anticipate the ECB will announce at least a 25 bp rate cut in May, and possibly signal more to come, reversing course from tightening. Additionally, the ECB might revive some form of asset purchases if credit spreads blow out. There is precedent: in 2019, after trade tensions and weak industry data, Draghi guided rate cuts and restarted QE. This time, Christine Lagarde (ECB President) has warned tariffs “unsettle the trade world as we know it” and could have global spillovers.
The ECB is coordinating with other central banks – for example, currency swap lines to ensure euro/dollar liquidity. Behaviorally, the ECB’s early hints are meant to shore up confidence (a forward guidance tool) – by saying “we stand ready to act”, they hope to prevent a credit crunch in advance.

American and European left-wing economic circles argue central banks should not overreact to supply-side inflation at the cost of jobs (they cheered the idea of Fed’s average inflation targeting which tolerates overshoots). They currently would say: ‘Don’t repeat the errors of the past; the bigger threat is a downturn and financial instability, not a second wave of inflation’.
On the right-wing side, especially among some German and U.S. conservatives, there is concern that easing too soon will entrench higher inflation and punish savers, and that central banks might be yielding to political pressure.

A dovish ECB would be interpreted as weakness that Trump could exploit.
An early ECB cut would support the idea that European nations are willing to compromise for short-term relief. That, in turn, creates a window for Trump to put Europe on the negotiation table—using the promise of stabilization as leverage for tax cuts or debt ceiling adjustments in the U.S.
If Europe shows signs of sticking to high rates despite the trade war rather than easing, then that rigidity can actually worsen market sentiment.

China’s response to tariffs is domestic stimulus – the PBoC has cut bank reserve requirement ratios (RRR) and even trimmed policy interest rates to spur lending.
It is also guiding banks to keep credit flowing to small exporters hurt by tariffs. The PBoC and China’s state banks may also intervene to steady the yuan if needed, dipping into their $3T reserve war chest. By easing policy, China actually contributes to global liquidity (a more accommodative stance can leak out via increased imports from neighbors, less competition for global capital, etc.). If China were to tighten in the face of tariffs (which it won’t), that would be pro-cyclical and worsen things. Instead, China is explicitly focusing on stimulus and strengthening ties with alternative trading partners, effectively taking a different route than confrontation – a rational response to mitigate damage.

The BoJ is an interesting case. It has been under pressure to normalize policy given that Japan finally saw inflation above 2%. However, global turmoil gives it cover to delay any tightening. In April 2025, the BoJ left its yield curve control in place (10-year JGB yield cap ~1%) and policy rate negative, noting it did not want to contribute to global market stress.
Governor Ueda hinted that while domestic conditions might have justified some tightening, the external environment is too risky – essentially a “pause” citing global uncertainty (likely referencing the yen carry unwinds and financial volatility). If the yen surges too much (carry unwind), the BoJ might even intervene (as it did in 2022) to smooth FX moves. But so far, yen strengthening is a natural stabilizer – it tightens Japan’s financial conditions a bit (which the BoJ might quietly welcome to tame import inflation) but not too dramatically yet.
The BoJ also provides a stabilizing influence by continuing asset purchases; Japanese investors, faced with domestic caps, will still invest abroad (once volatility settles), providing some support to global markets.
In a behavioral sense, the BoJ has been the anchor of low rates – as long as it stays put, some investors will continue to engage in carry trades (perhaps shifting to other funding currencies like euro or Swiss franc if yen is less favorable due to volatility).

Trump’s deliberate use of manufactured chaos – from debt-ceiling brinkmanship to tariff salvos – has created a highly fluid situation.
This chaos is a negotiating tactic to keep opponents off-balance and force reactive moves. As we’ve seen, markets and central banks form a reactive feedback loop to these shocks.
Trump’s threats (whether default or trade war) spook markets, markets sell off, then policymakers (e.g. the Fed, ECB) respond to stabilize conditions, which in turn can embolden further aggressive bargaining.
It’s a high-stakes game of chicken.
Leading indicators like credit spreads, equity volatility, and PMI surveys become as important to watch as official GDP or CPI releases. If credit spreads start narrowing and equities stabilizing, central banks may feel less urgency to ease aggressively. If, on the other hand, we saw something like a funding strain (LIBOR/OIS spread widening, or a major bank in trouble), policymakers would intervene swiftly (as they did in March 2023 with bank backstops).

The German “regime shift” on fiscal policy – overturning decades of austerity – is a game-changer for Europe, and it flew under many investors’ radar because headlines were dominated by U.S.-China drama. But this unlocks hundreds of billions of Euros for investment.
Strategically, this means Europe could become a relative bright spot in global demand late in 2025 and 2026, just as the U.S. perhaps slows under trade pressures. A well-capitalized European defense and infrastructure push can create jobs and profits within Europe.
For investors, European equities (particularly industrials, construction, defense companies) may have a more solid fundamental backing now – a structural trend that could outlast the current turmoil. Right-wing European commentators (and some on Wall Street) cheer this as belated but welcome, arguing Europe needs fiscal expansion to share the burden long shouldered by monetary policy. Left-wing voices in Europe also support the investment (especially in green infrastructure), though they urge that it be directed to inclusive growth. From a macro strategy angle, Europe’s fiscal loosening combined with the ECB’s likely easing is a bullish mix for European assets, although partly priced in after the relative outperformance noted in Q1.
A risk to monitor is if bond markets question debt sustainability – so far that’s in check, but if German yields keep rising with big issuance, the ECB may need to tacitly cap yields (possibly via its existing tools like the TPI backstop for Italy).
This is a very important precursor of a potential change.