Actions & Reactions: Rethinking the Global State of Play

TARIFFS

What we know: The US has reached trade deals with some countries, though trade tensions with China have been rattling markets lately amid trade actions, retaliatory measures and threats.

Effective tariff levels look like they will settle in the 15% to 20% range. The US Court for International Trade (CIT) has rejected emergency tariffs authorized through the International Emergency Economic Powers Act (IEEPA), and the US Supreme Court will consider the Trump administration’s appeal in November. If the IEEPA tariffs are deemed illegal, the Treasury may need to refund all tariffs collected from importing firms. All tariffs imposed during President Trump’s first term and sectoral tariffs remain.

Currently, China faces a 20% IEEPA fentanyl tariff rate and a 10% IEEPA reciprocal tariff rate, in addition to prior tariffs imposed in Trump’s first term and Biden’s term. The second 90-day moratorium keeping the IEEPA reciprocal rate at 10%, rather than the threatened 125%, expires on 10 November. Exemptions from Section 301 tariffs on Chinese goods for semiconductors, crucial minerals, and batteries (among other goods) expire on 29 November. Despite apparently constructive talks on trade between the US and China up until mid-September, the Trump Administration introduced several new restrictions. China in turn announced retaliation measures in response to increased pressure by the Trump Administration. By mid-October the trade standoff settled into a new status quo with China continuing to emphasize that the door remains open for discussion but retaliation is also on the table if the US chooses to escalate again.

What we don’t know: Just how high the final effective tariff rate will be. Will the US Supreme Court uphold the CIT’s ruling? Will tariffs encourage a realignment of global trade? How will tariffs impact US real GDP? Will companies be able to absorb the added cost of tariffs, or will the cost be passed on to consumers? Will China and the US be able to reach a trade deal? 

Our view: Regarding US-China trade relations, we think the two countries will continue working toward a trade deal. Our base case is for the US and China to reach a partial deal in 2026, while acknowledging there’s a wide range of potential outcomes.

We expect the Supreme Court to rule on the legality of the IEEPA tariffs by January 2026. We expect the court to uphold the CIT’s ruling. If IEEPA tariffs are struck down, businesses could get refunds on tariffs paid thus far, which could be a source of stimulus in 2026. Regardless of the outcome, the world still faces a major and disruptive step up in tariff rates. There are a lot of other laws that the Trump administration can use to implement tariffs. We anticipate high sectoral tariffs on autos and parts, steel and products, aluminum and products, copper, critical minerals, pharmaceuticals, semiconductors, lumber and timber. We view tariffs as a tax on growth, but they are unlikely to drive the US economy into recession on their own unless they are raised much higher than we currently expect. In any case, we believe tariff hikes will be passed onto the consumer, eventually. 

THE BUDGET

What we know: Congress needed to pass, and the president sign, 12 appropriation bills before the new fiscal year started on 1 October. The back-up plan was to pass a continuing resolution (CR) to keep the discretionary parts of the federal government operating for long enough to pass the appropriation bills. The House passed a CR in late September that would last until 21 November. The Senate, however, did not muster the 60 votes necessary to pass a CR and a shutdown began on 1 October. The major sticking point is that Senate Democrats wanted to attach to the CR a provision that would renew tax subsidies to hold down premiums for policies written using the Affordable Care Act (ACA). Those tax subsidies will expire at the end of 2025. Congressional Republicans won’t accept a full renewal of those tax subsidies, and so the two parties have come to an impasse. As of 24 October, around 2 million federal civilian workers missed paychecks. 

A partial shutdown involves only “discretionary” spending. Mandatory spending (including Social Security and interest on the debt) is not affected. Government enterprises like the Post Office are not affected.

Importantly, if Congress passes the CR before it expires on 21 November, it will have to pass a new one (or pass the 12 appropriation bills).

What we don’t know: How long will the shutdown last? How will markets react to a prolonged shutdown? How will it impact the economy? How much would a new budget (or CR) change government spending projections?

Our view: At this point, we expect Congress to pass a CR by early November, but there is potential for it to last until close to Thanksgiving in the United States, on 25 November. We expect a long shutdown to cut GDP growth in Q4 and hit payrolls and employment in the October Employment Report. There could be some supply-side effects on the economy.  

THE FED AND MONETARY POLICY

What we know: The next Federal Open Market Committee (FOMC) meeting is scheduled for 28-29 October. The FOMC cut rates in September by 25 basis points in response to a cooling labor market. It stated that it is attentive to both sides of its dual mandate and that downside risks to employment have risen. Fed Chair Jerome Powell called the rate cut “risk management.” 

What we don’t know: How much will tariffs impact inflation? For how long? Will payroll figures continue to slide? A large drop in net immigration could slow the growth of the working-age population, which would slow the pace of sustainable payroll growth. Will deregulation and tax cuts boost hiring? What will happen with Federal Reserve Governor Lisa Cook’s lawsuit challenging President Trump’s move to dismiss her from the Board of Governors? Will Federal Reserve Regional Bank presidents be reappointed? Who will President Trump nominate to succeed Jerome Powell as Fed Chair?

Our view: The Fed seems willing to consider tariff-related inflation a temporary increase, especially in light of a weakening labor market. We expect more cuts to come and will be watching forward guidance closely. The Fed has a dual mandate of price stability and maximum employment, and the economy is challenging both goals. 

The Federal Reserve Board position vacated by Adriana Kugler and filled by Stephen Miran, President Trump’s Council of Economic Affairs Chief, expires on 31 January 2026. In the meantime, the president is reviewing possible candidates to fill that position on 1 February. We expect the president to announce a nomination in early autumn to give time for the Senate to hold hearings and vote on the nomination. The implication is that whomever the president nominates will likely be nominated as the new Fed Chair. The nomination will be highly informative of what kind of monetary policy we should expect, and it could be market moving.

CORPORATE HEALTH

What we know: Mega-cap tech earnings-per-share (EPS) growth is slowing now, but consensus EPS estimates for 2026 continue to look healthy. Our Credit Analyst Diffusion Indices, or CANDIs, are signaling late-cycle dynamics as well, but cost pressures appear to be mounting. 

What we don’t know: How will uncertainty impact capital expenditures and investment? Will companies be able to pass on higher costs to consumers? Will companies experience a supply shock from trade barriers? How much will margins decline if the economy weakens? Will deregulation and tax cut extensions provide a boost? 

Our view: We believe corporate health remains resilient. Bottom-up credit fundamentals and margins are in good shape, and earnings growth remains strong. That said, we anticipate a more challenging operating environment for corporates in the coming months, especially smaller businesses, as they navigate uncertain trade policy and higher input costs. 

THE CONSUMER

What we know: Consumer health has been bifurcated, with higher-income consumers holding up better than lower-income consumers. On the positive side, mortgage delinquencies are low and debt service ratios appear manageable. On the negative side, household debt is rising, consumer confidence is gloomy and delinquencies on auto and credit card debt have risen. Moreover, student loan payments, which were suspended during the pandemic, have resumed. 

What we don’t know: Will lower sentiment translate to lower spending? At what point would rising costs from tariffs create demand destruction among consumers? Will a cooling labor market affect consumer confidence and spending?

Our view: The consumer still appears fairly healthy in aggregate, but we see some vulnerabilities, particularly among lower-income consumers. We expect spending to slow from very elevated levels. We’ll be watching the wealth effect closely— it has been a large factor propping up spending over the past few years, and a sustained decline could foreshadow a larger pullback in spending.