Do tariffs still bite? ING weighs in

Renewed U.S. tariff threats, with President Trump proposing duties up to 70%, are back on the agenda, though markets have shown resilience. ING analysts contend that the current benign U.S. inflation is a temporary lag effect, expecting prices to rise significantly this summer as companies' inventory buffers, accumulated pre-tariff, deplete. This anticipated 'hot inflation' is projected to prevent a September Fed rate cut, pushing potential easing to November or December, while broader economic growth is expected to remain muted due to persistent tariff-related sentiment fragility.

Analysis

Despite renewed US tariff threats, with potential rates ranging from 10% to 70%, markets are exhibiting resilience, reflected by the S&P 500 reaching all-time highs. However, analysis from ING suggests this stability is precarious, arguing that the current benign inflation is a lagged effect. ING contends that companies preemptively built up inventory to absorb the initial tariff impact, creating a temporary buffer. This buffer is expected to erode, leading to a 'summer of hot inflation' as companies, particularly those with low pricing power, are forced to raise prices. This forecast for rising inflation, expected to become visible in the June through August data for the core PCE deflator, directly challenges market expectations for monetary easing. Consequently, ING anticipates the Federal Reserve will defer a widely anticipated September rate cut, pushing a potential restart of easing to November or more likely December. While the overall economy has held up and the labor market remains strong, ING warns that sentiment is fragile and future growth will be more muted, presenting a particular risk to the nation's public finances.

Key Decisions for Investors

• Re-evaluate positions predicated on a September Federal Reserve rate cut, as the analysis indicates a significant risk that anticipated tariff-driven inflation could delay easing until late Q4.
• Scrutinize companies with high import exposure and limited pricing power, as their profit margins are poised for compression once inventory buffers are depleted and higher tariff costs materialize.
• Given the disconnect between the S&P 500's all-time highs and the forecast for fragile sentiment and muted growth, consider hedging strategies to protect against potential market corrections if inflation accelerates and rate cut expectations are repriced.