European stocks (^STOXX50E, ^FTSE, ^GDAXI) are taking a hit following President Trump's auto tariff announcement. Principal Asset Management chief global strategist Seema Shah joins Morning Brief hosts Madison Mills and Brad Smith to discuss the role of tariffs in the escalating risks of a recession.
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Helps us make sense of the policy negotiations that have been put forward thus far and what type of recession risk profile you're placing on that?
Good morning. Uh, well, I think in terms of the policies that we're seeing come through, the biggest surprises, I guess, has been really in the sequencing to which it's come with the initial expectation being that there'll be some kind of shoring up of the US economy before you get some of the the hits such as tariffs. Of course, that hasn't happened. We've we started off with tariffs, and actually the impact is set to be more severe than I think anyone was anticipating at the beginning of the year. So from our perspective, the the odds of recession have increased quite clearly. Uh, we have concerns about what is going to happen to consumer spending, how the labor market is going to respond to the Dodge inspired job cuts. But overall, we still think that in the second half of the year, we're assuming that there's going to be some good news coming in, uh, either in terms of the extension of tax cuts, deregulation, and hopefully a Federal Reserve rate cut. Now, a lot of that is steeped in uncertainty. Even today specifically with the the announcement of auto tariffs, it really does raise the risk that inflation moves a little bit higher than what people are anticipating, which would make it certainly a lot more challenging for the Fed to to move forward with with with additional rate cuts.
And and Seema makes me wonder since you mentioned the Fed and obviously the policy uncertainty, how much is the market relying on either a Fed put or a Trump put and perhaps both of which are are not here anymore?
I think there is some reliance, you know, when we're thinking about at least what the market is anticipating for the Fed, they're only pricing in one or two cuts this year. So it's not very, very significant. But I think it's the idea that, look, if the Fed was in a position where it couldn't rate raise, where it couldn't cut interest rates because of inflation concerns, and at the same time that inflation is really eating into consumer spending, then I think the market would would certainly respond quite negatively. So we can see this feeding in through today. The market is really responding in a negative reaction because of the concerns around inflation and then what position that puts the US in the US Federal Reserve in.