by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with developments in the global auto and oil industries, largely reflecting the Trump administration’s new US tariff policies. We next review several other international and US developments with the potential to affect the financial markets today, including a Chinese retaliatory strategy that will crimp US access to critical minerals and magnets and a review of a key Federal Reserve board member’s speech in St. Louis yesterday.

Global Auto Industry: President Trump yesterday acknowledged that auto and auto parts makers will “need a little bit of time” before they can boost production in the US, adding that, “I’m looking at something to help some of the car companies.” The statement raised hopes that the administration will provide tariff relief on autos and parts or perhaps offer some other kind of aid. In response, global automakers are enjoying big gains in their share prices so far today.

• It’s not clear how Trump could have failed to realize the time and cost it would take for automakers to adjust to his tariff policy and shift production to the US.
• Nevertheless, Trump’s statement will likely be taken as a welcome sign of flexibility in his policy approach. This will raise hopes that he may soften his policy or implement it more gradually going forward, not just for automakers but for other key industries.

Global Energy Industry: In its latest report on the oil market, the International Energy Agency slashed its forecast of demand growth this year by about one-third to just 730,000 million barrels per day. According to the agency, the smaller figure largely reflects weakening demand in the US and China as those countries impose disruptive tariffs on each other. Faltering demand growth and increased production by key suppliers is likely to keep weighing on global oil prices in the near term, with Brent today down some 0.8% to $64.41 per barrel.

Global Defense Industry: Even though President Trump has issued orders aimed at boosting the US shipbuilding industry and accelerating the construction of ships for the US Navy, he said in a statement last week that he may ask Congress for authority to buy future navy ships from foreign countries in the interim. It appears that the most likely foreign suppliers of navy ships would be Japan and South Korea.

• As we have often noted, questions about Trump’s commitment to US allies have already prompted key countries to accelerate their defense rebuilding. We think that has created investment opportunities, especially in European defense stocks.
• It would probably take some time for the US to significantly boost its orders to Japanese or South Korean shipyards. However, given the enormous size of the US defense budget, any such program could be a boon to Asian companies and defense stocks.

China-United States: Amid all the news on the US-China tariff war over the last week, many investors may have missed an equally important new trade barrier. Late last week, Beijing said it is suspending the export of several critical minerals and advanced magnets. Since China has a virtual monopoly on the supply of such products, the move threatens to disrupt the operations of automakers, aerospace manufacturers, semiconductor firms, and military contractors around the world, at least when those companies work through their current inventories.

• After President Trump announced his “reciprocal” tariffs on April 2, China said one of its retaliatory measures would be to impose licensing requirements for the export of six heavy rare-earth metals, which are refined entirely in China, and rare-earth magnets, 90% of which are produced in China.
• Chinese officials say the export suspensions are only to allow the government to develop the required licensing procedures. Of course, the risk is that Beijing will slow-walk that process, essentially leaving in place an export ban on the rare earths and magnets.

Japan: New official data released yesterday showed that the Japanese population fell 0.44% to just 123.8 million in 2024, marking the 14^th straight year of contraction. In addition, the share of those aged 65 and older hit a record 29.3%. Low birth rates, falling headcounts, and population aging continue to present long-term challenges for the Japanese economy and businesses, even though labor market reforms in recent years have temporarily averted problems by drawing more people into the labor force.

Germany: The ZEW Economic Sentiment Index dived to -14.0 in April, down from 79.6 in March. The reading was much worse than expected. The ZEW indicator tracks the expectations of analysts at German banks, insurance companies, and other firms, and the latest reading likely reflects plummeting confidence in Europe’s largest economy after President Trump announced his big tariff hikes earlier this month.

United States-United Kingdom: Vice President Vance said in an interview yesterday that he sees “a good chance” of the US and the UK striking a free-trade deal “that’s in the interest of both countries.” As a reminder, the Trump administration has only subjected the UK to the president’s baseline tariff of 10% so far. A US-UK trade deal would be a political boon for British Prime Minister Starmer, but some members of the Trump coalition might push back against any concessions to UK manufacturers, especially if they help Starmer’s center-left Labour Party.

US Monetary Policy: At an event in St. Louis attended by Confluence personnel yesterday, Fed board member Christopher Waller discussed how he is thinking about President Trump’s tariff hikes and what they might mean for US monetary policy. Importantly, Waller insisted that higher US import tariffs would only boost consumer price inflation temporarily. However, he stressed that uncertainty surrounding the tariffs could weigh heavily on economic growth, with many firms telling him they have frozen investment and fear going out of business.

• To guide his thinking about the tariffs, Waller said he is considering two basic scenarios. In his “long lasting, high rate” scenario, Waller envisions average US import tariffs staying at 25% through at least 2027, up from about 3% at year-end 2024. In this scenario, Waller said he would expect inflation to surge to as much as 5%, but only for a short time. He expected that growth in this scenario would slow sharply, potentially setting the stage for multiple interest-rate cuts.
• In his “temporary, low rate” scenario, Waller assumes the average import tariff would quickly fall back to 10% as the US and other countries negotiate new trade relations. He expects inflation in this scenario to rise to only about 3% and then fall back quickly. In this scenario, Waller suggested the Fed would stand by its current plans to cut rates just a few more times before the end of this year.

US Tariff Policy: Reports yesterday said the Trump administration has opened investigations into the national security implications of relying on foreign semiconductors, semiconductor manufacturing equipment, pharmaceuticals, and pharmaceutical ingredients. The probes are being widely seen as preliminary steps to imposing steep new import tariffs on semiconductors and pharmaceuticals, especially those from China. Those new tariffs could come in the next few months, once the probes are completed.

• Separately, in a quarterly earnings call, healthcare giant Johnson & Johnson today said it expects as much as $400 million in tariff costs on medical devices this year, counting only the baseline, reciprocal, and other tariffs announced so far.
• Based on those tariff costs, the company boosted its 2025 sales forecast but kept its earnings expectation unchanged. The forecasted numbers would presumably change if the Trump administration imposes steep tariffs on pharmaceutical imports later this year.

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