Has The Stock Market Bottomed Out Yet Or Will Tariff Threat Keep It In The Red?

10 months ago

Andrzej Skiba, Head of BlueBay U.S. Fixed Income at RBC Global Asset Management, joined Forbes' Maggie McGrath to talk about the market reaction to Trump's retaliatory tariffs and what they mean for the U.S. economy.

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Transcript

00:00Hi, everyone. I'm Maggie McGrath, Senior Editor at Forbes. U.S. stocks are in the red on Thursday

00:09following President Trump's reciprocal tariff announcement. The Nasdaq, the Dow, and the

00:16S&P have all been down 3 percent or more in early Thursday trading. Joining us to talk

00:22about the economic impact of these tariffs and also the market reaction is Andre Skiba.

00:28He is the head of Blue Bay U.S. Fixed Income at RBC Global Asset Management. Andre, thank

00:34you so much for joining us on what is one of the busiest days for the market of perhaps

00:38all of 2025.

00:41It is indeed, Maggie, but pleasure to be here with you.

00:44So let's start with where we are right now with the markets. It's just red everywhere

00:48you look and has been all morning, really, ever since the tariff announcement became

00:54official yesterday afternoon. What's your reaction to what we're seeing in public markets?

01:01Investors were shocked by the extent of the tariffs and particularly looking at some individual

01:08countries that were hit with tariffs well in excess of 20, 30 percent. That really played

01:14with investor imagination. So we're seeing a pretty sharp response in the markets today

01:21as many ponder whether this is big enough of a hit to U.S. economy, to U.S. consumer,

01:31to start talking about recessionary risk ahead.

01:35We'll get to that recessionary risk, but one of my questions for you is you've released

01:39commentary earlier this week saying that you've held the view since the election that Trump

01:43is serious about tariffs. And I think investors broadly shared that, that perspective. So

01:50what accounts for the magnitude of today's losses? Was it that the details of the tariff

01:56plan were relatively scant up until yesterday?

02:00I think there are two factors at play here. The first one is that while many investors

02:06we spoke to over the recent months believe in tariffs being a real threat, most expected

02:14them to be piecemeal, targeting maybe specific sectors rather than entire countries and also

02:20at rates that are lower than what was announced. Many investors we spoke to also questioned

02:30how much of an inflationary pressure we could see as a result of those piecemeal tariffs.

02:35So I think the first factor that led to such aggressive reaction is the realization that

02:42those hopes of a small tariff package, something very specific to an industry or two, were

02:51essentially naive and the market was complacent in assuming a mild version of a trade escalation.

03:00The other reason why we think we've seen such a strong reaction is indeed because of the

03:05magnitude of tariffs on some key trade partners for the US. The fact that we're not seeing

03:1310% tariffs, 15% tariffs, but in many cases 20% and above. That really played with investor

03:21imagination. And even though when you look at the details, they suggest that not only

03:26Canada and Mexico are exempted for now, but also quite a number of goods categories are

03:32exempted for now. Just the sheer magnitude of individual country tariffs really pushed

03:39sentiment in a negative direction.

03:41Let's talk about those key trade partners. As you look at the long list of countries

03:46and territories that will be, according to President Trump, the recipients of these reciprocal

03:51tariffs, what are the two, three or five that most stand out to you and or are most concerning?

04:00When you look at the volume of US imports, two countries or blocks really stand out.

04:08The first one being European Union, the other one being China. So between those two partners,

04:16you already have around a third of our trade accounted on the import side. Canada and Mexico

04:25account for another 30%, although, as we mentioned, they were largely spared. So when

04:32we're looking at the detail, focus is clearly on some of the largest trading partners for

04:36the US. So European Union, China, Japan, South Korea, UK being good examples of those trading

04:45partners where tariffs placed on goods coming from those partners are material enough to

04:52move the needle for the overall tariff that we will face.

04:57So if you were President Trump and you were to make a deal with any of the areas, blocks

05:04or countries that you just mentioned, or if you were a leader of one of the areas, countries

05:09or blocks that you just mentioned, who's the first phone call? What if we could fix one?

05:15What's the one that you would identify as? Let's make something happen here so we can

05:19lower these percentages or get rid of it entirely.

05:22Well, thankfully, I'm not in a position of US negotiators as we will try to address this

05:30situation. But I think, you know, in terms of agreements that could be easier to be made

05:38could be one with Europe, for example. Europe is looking to Europe is looking to find a

05:48partnership with the US in the context of its rearming. And as Europe is trying to respond

05:54to the challenges that the continent is facing, US is a partner that Europe needs. So we do

06:01believe there is a compromise to be found between EU and the US. We also absolutely

06:10believe that not just to do with Europe, but with a variety of trade partners, there will

06:16be almost like a two track process happening right now. One being retaliation measures

06:21taken by those countries and then looking to US trade team to respond to those. But

06:30at the same time, conversations about potential concessions, about ways to reduce the tariff

06:36burden to actually find an agreement that lowers some of the rates that were announced

06:42yesterday. So it could be this two track process, where first you get have headlines

06:47about retaliation. And that is something that we believe market will be spooked by. But

06:53then the work of finding compromise, finding ways to reduce the burden will ensue. We do

07:01believe, however, that the end state when it comes to the average level of tariff that

07:07we will see is probably not too dramatically lower compared to what we've seen yesterday.

07:13So there is some room for improvement. But we don't think that you will see a dramatic

07:18reduction in the level of tariffs that are charged in the months ahead.

07:23So no matter what negotiations happen going forward, we're still looking at, I believe

07:29you had put out a 10%. Oh, 10% tariffs are likely to be an inflationary to inflation.

07:36Let's go back to the piecemeal comment that you made, because we've been talking a lot

07:40about the tariffs that could affect the auto industry. But as you look at what was announced

07:46yesterday, what do you see as the economic sectors in the US who are that are most vulnerable

07:52right now?

07:53So the market was focusing attention on a pretty short list of sectors that are most

08:01vulnerable in the context of a trade escalation. As you correctly mentioned, auto parts were

08:09one of the clear examples, but it's not the only one. We're seeing a meaningful hit to

08:16sectors like discretionary consumer goods, where you import a lot of those goods and

08:23those prices will be impacted by the tariffs that were announced. Similarly, within the

08:29industrial complex, quite a number of, for example, chemical products could be imported

08:37into the US. So we're seeing pressure on companies where supply chains are international in nature

08:45and that they can be impacted quite hard by what's been announced yesterday. So there

08:53are clearly a number of sectors that have been disproportionately hit. But we also know

08:58that these sectors were pretty well telegraphed. So when we're looking at the performance of

09:06fixed income instruments from those sectors in recent months, we've already seen underperformance

09:14of those trade sensitive sectors manifesting itself in anticipation of the announcements

09:21that we've seen yesterday. So as far as we're concerned, actually, in case of those most

09:27impacted sectors, probably most of the price adjustment has already occurred. And our

09:33attention is actually switching to other topics like, for example, the overall strength and

09:40resiliency of the US consumer, whether that will remain in place.

09:45Well, you fed into my next question, because I do want to go to your market commentary

09:49from yesterday, where you said that 10% tariffs are likely to be inflationary. Can you talk

09:58a little bit more about now that we have the fuller tariff plan, what are your inflation

10:03expectations and how equipped is the US consumer to handle something like this?

10:08Yes, without a shadow of a doubt, these tariffs are likely to push inflation higher. So prior

10:15to the announcement yesterday, our base case working assumption was that the end state

10:21will be an average tariff of around 10%. And based on our analysis, that was likely to

10:28add up to one percentage point to headline inflation. One percentage point doesn't sound

10:34like a lot, but from Federal Reserve's perspective, it is a very meaningful amount that

10:40actually could make all the difference between being able to cut rates and not. So with the

10:46announcements yesterday, the average tariff that we are calculating on the back of those

10:52announcements, and taking into account the exemptions that were announced as well, is

10:57somewhere in the range of 15%. So clearly higher than the number that we were looking

11:04for. And we will see whether the end state tariffs after all the negotiation is finished,

11:09trends towards that 10% level. But if we stay around the parameters that were set yesterday,

11:17clearly, that upward pressure on inflation will be even greater than the one percentage

11:22point that we were expecting earlier, maybe one and a half percent, if not higher. So

11:29clearly, we do believe that U.S. consumers will be feeling the pinch of dealing with

11:36higher priced items, higher priced goods, and that will translate itself into overall

11:42higher levels of inflation, something that we do not believe Federal Reserve can ignore.

11:48Well, in mentioning the Federal Reserve, I'm thinking of President Trump's pressure on

11:53Fed Chair Jerome Powell to cut rates. So is this tariff announcement conflicting with

12:01his desire for lower rates? And could that conflict potentially have an effect on tariff

12:07policy as the reaction continues to unfold in your view?

12:13Well, I think that's a fascinating question, because right now, as you're looking at

12:19Treasury markets, and we're talking about inflation moving higher, you would not expect

12:25a rally in Treasury prices when this is the outlook that we are considering. Instead,

12:32we are seeing investors flocking to Treasury bonds as a safe haven. And we think that is

12:40really to do with growth fears. So right now, what's foremost on investors' mind is the

12:48growth concerns for the U.S. economy. And in that environment, you really want to increase

12:56your exposure to U.S. Treasuries as a way to protect your portfolios from that growth

13:04negative pressure. At the same time, once we believe there will be clarity over the

13:10coming weeks about the extent of the tariffs or the end state that we're dealing with, I

13:15think investors will start asking questions about the inflationary impact. And that could

13:21lead to a pressure on Treasury prices, upward yield pressure, as investors realize that

13:29Federal Reserve might not be in a position to cut rates, even in the face of a slowing

13:35economy. But for the time being, all of the focus is on growth. And that is the reason

13:41why Treasuries are rallying rather than investors pondering what kind of inflationary impact

13:46we will see over the months to come. So we're seeing a flight to safety to Treasuries. Meanwhile,

13:52I believe you're getting questions from clients about, I know it's impossible to fully time

13:57the market, but I think they want to know, is the pain that we're seeing today all that

14:01red? Is this the worst it will be? Or will the market continue to go down? And is there

14:07a better buying opportunity for equities in the future?

14:11Look, when we are considering investor behavior in recent years, buy the dip mentality has

14:18been so strongly ingrained in investor psyche. And we are really curious to see whether the

14:26same attitude will kick in, in short, all the again. We think that we might have to

14:35wait a little bit for that. However, the simple reason being is we're not done with

14:41negative headlines. After the announcements yesterday, we expect to see all the retaliation

14:47announcements from U.S. trade partners. That is likely to add to volatility. Then you will

14:54see a response from the U.S. to those retaliation announcements, which further could exacerbate

15:01fears within the market. So we think for the time being, it's probably too early to

15:06buy the dip. There could be more volatility ahead. Having said that, when we're looking

15:11at the range of risk indicators, we're close to hitting peak bearishness in a number of

15:18segments of the market. So once policy clarity is gained, once we have better information

15:26about what the end state of this trade escalation is likely to look like, we do believe there

15:32will be some investors who will be willing to step into the void. But we might have to

15:37wait a little bit longer for that. And those investors that are likely to step in are the

15:44ones that do not believe in recession as a base case scenario for the U.S. We are definitely

15:49in that camp. This is not our base case assumption. But clearly, there's also a lot of investors

15:56who are very worried about recessionary risk ahead.

16:01You fed into my next question. I was about to lay out a math problem where bearish markets,

16:06inflationary economic conditions, are we headed towards a recession? But you just said that

16:13is not your base case. So what is your base case for the U.S. economy right now?

16:19Look, we absolutely assume slower growth as a result of all that is happening around us.

16:26It's inevitable that this will have negative impact on U.S. growth ahead. However, we believe

16:33that it is still likely that we settle around one and a half percent growth in the U.S.

16:39There is some downside risk to that number. But from one and a half percent, even with

16:45some downside, there's quite a long way to negative readings. And to us, the key question

16:51is really about the health of the U.S. consumer. Because so far, U.S. consumer has proved itself

16:59to be resilient to the extent that very few investors expect it. Two key factors really

17:06helped U.S. consumers. First, the fact that the labor market's been pretty strong. We

17:14have not seen any meaningful pickup in layoffs within the U.S. market, away from all the

17:22drama to do with Doge. We have not really seen any material negative shift in the labor

17:28market. And the other thing that helped is so many consumers refinanced mortgages when

17:34the rates were around 3 percent. So they're not feeling the pinch from higher level of

17:39interest rates. If we start seeing layoffs increasing in a material way, to us, that

17:48would be a reason to worry. And that would be a reason to start discussing recession

17:55as a more probable scenario. But for the time being, we're just reflecting on the fact that

18:01when we're looking at sentiment data, it's been quite wobbly. It's been quite weak in

18:07recent weeks. However, when you look at hard data, it has been pretty robust. So we're

18:14not seeing the evidence yet in U.S. economy of the consumer weakening aggressively. And

18:20for as long as that is the case, we do not believe a recession will happen in the same

18:25way as recession did not happen in 2022, when so many investors were expecting that outcome.

18:34That's a good point. I spoke to a labor economist last week who talked about how frozen the

18:38labor market is now. A lot of companies are sitting on cash and not hiring. And it's been

18:43a big wait-and-see game. When do you think the wait-and-see game will end? It sounds

18:49like you guys are also waiting and seeing. How much longer are we just sitting tight?

18:53Well, look, we hope that it's not too long, because you have two key factors that investors

19:00were focused on over the coming weeks. The first one was the resolution of this very

19:05trade escalation, this trade war that we are witnessing right here, right now. But the

19:13other point was to do with the budget and seeing whether this administration, Trump

19:19administration, will have an ability to cut taxes, push through the budget, and have an

19:25agreement in Congress around that. So when it comes to the trade war, we do think that

19:33over the coming weeks, probably by the end of April, maybe early May, we should have

19:38a good idea about what the end state is, something that markets can coalesce around, have a bit

19:45more clarity over. And then we do believe it's not going to be too much of a wait to

19:51have answers to do with the U.S. budget as well. And I think once you have those in place,

19:57once you know what's the level of tariffs, what's the level of taxes, what kind of incentives

20:03for CapEx and U.S. investments investors and corporations will have, I think it will be

20:10easier to make decisions. Right now, everyone is trying to deal with this fog of uncertainty.

20:19And as you rightly mentioned, that means deferring investment decisions. That means

20:25deferring choices that you might have hoped to make earlier this year. Instead, you might

20:31have to wait a little bit longer. But we do not believe that wait will be till, let's

20:36say, later this year. We're probably going to have a lot of clarity by the time the summer

20:41comes. So the markets are in the red. Clarity might come by the time summer comes. And RBC

20:48is not yet predicting a recession. I do want to close with a different version of the questions

20:53I've been asking. We've been talking about the negative ramifications of this tariff

20:57announcement. Again, markets are down. People are worried about inflation impact. Is there

21:02any economic benefit to what President Trump announced yesterday? Is there a method to

21:08the madness that could benefit the U.S. economy or equity markets or fixed income or anything

21:14we've been talking about today?

21:16Well, look, there's always a silver lining to events like that. And there's a couple

21:23of those that we can highlight. The first one is the fact that dollar is weaker as a

21:29result. That will help U.S. exporters. So that's seen as a positive. The other thing

21:39that also over time will help U.S. economy is re-onshoring of production to the U.S.

21:47There's a very clear message from the Trump administration that if you produce in the

21:52U.S., you will not be faced with any of those tariffs. So clearly there are some trade

21:56partners, some corporate investors who will decide to move production facilities to the

22:03U.S. We've seen already quite a few of those announcements earlier in the year. And that

22:08clearly would be positive for the U.S. economy. So I would say that is a second silver

22:17lining. And the third one is the fact that as part of negotiations, as part of concessions

22:22that might be found, some of the external trade barriers that were preventing access

22:28for U.S. goods to global markets might be removed. That would be one of the easiest

22:35ways to reduce tariffs going forward and would have a lasting positive impact for the

22:43U.S. So it feels quite dark. It feels really challenging right now when you're looking

22:51at market trading levels. But we do believe that there are silver linings for the U.S.

22:59economy as the dust settles and we have clarity over what policy looks like ahead.

23:08Andrei Skiba, head of Blue Bay U.S. fixed income at RBC Global Asset Management. Thank you so much for sitting down with Forbes. We

23:15really appreciate your time and your insight today. It's been my pleasure. Thank you.

Has The Stock Market Bottomed Out Yet Or Will Tariff Threat Keep It In The Red? | Forbes

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