On Wednesday, Trump changed his stance on tariffs, leading to an analysis by Bloomberg. The current tariff mix is now less favourable, as China exports a greater volume of consumer goods to the US compared to other countries.
As a result, increasing tariffs on these imports to 125% will likely reduce consumption of goods. The average effective tariff rates decreased from 27% to 24%.
Impact On Growth And Inflation
This situation is anticipated to negatively impact growth, increase inflation, and adversely affect risk assets.
This shift suggests a move towards a policy configuration that is more restrictive for consumer flow. Since China sends relatively more consumer-oriented products to the United States, compared with other trade partners, any tariff escalation—especially one as steep as taking rates to 125%—acts as a tax on end-buyers more than on intermediate suppliers or manufacturers. That means higher prices at the checkout counter.
The fall in average effective tariff rates, from 27% to 24%, is deceptive when viewed in isolation. While it seems like a policy loosening, the accompanying structural adjustments—in this case, the reallocation across product categories and asymmetric targeting—more than offset any relief on paper. We cannot treat trade-weighted averages as a full story when the composition shifts dramatically.
Growth models tend to be sensitive to these sorts of distortions. When consumption drops because of import price spikes, downstream suppliers and retailers usually trim expansion plans. That’s the part of the chain where we often see margin compression, followed by a drop in hiring. The inflationary results of this policy configuration aren’t just theoretical—they’re visible in forward pricing indicators and volatility clusters.
From a short-term trading point of view, risk-on assets may already be reflecting these shifts, but not evenly. Equities tied to consumer discretionary sectors, especially those with exposure to import-heavy supply chains, are beginning to lag. Commodity-sensitive instruments remain volatile, partially due to ripple effects from altered global shipping flows. Longer-dated options are starting to pick up activity, particularly in FX-linked bets.
Expectations In Trading And Investment
In the coming sessions, we’re expecting range-bound moves in interest-rate derivatives with a mild steepening bias. The shape of the curve matters more than year-end targets at this point, as front-end expectations are increasingly diverging from spot inflation prints. Rate hike speculation has picked up, though not uniformly across tenors, and that’s created openings for relative value positioning.
We’ve noticed that volatility smiles are beginning to develop again in index-linked options, particularly in contracts three to five months out. This likely reflects positioning for asymmetric downside surprises. Traders should monitor the 3M–6M skew and implied correlation metrics across equity sectors to gauge directional hedging activity, which in recent days has started leaning away from tech-heavy components. That shift matches the narrative around margin pressure and rerating risk.
In currency pairs, pushback against the US dollar’s recent strength has become evident. Part of that is due to speculation that rising consumer costs could damp demand, particularly if households respond faster than expected. Cross-asset flows into havens have ticked up—not dramatically, but directionally enough to read as protective rather than speculative.
Position sizing, especially in short gamma positions, has thinned out since Monday. Dealers seem more cautious, possibly due to increased sensitivity around liquidity assumptions in the face of policy uncertainty. That’s often a precursor to widening bid-ask spreads in less liquid contracts. Watch for these cracks before adding exposure.
The theme of redistribution—where who pays and who benefits changes week to week—has returned. That tells us to stay nimble with spread strategies and to avoid assuming that volatility surges will be uniformly distributed. Instead, execution should be timed to collect into relative mispricings as they emerge.
We’re not seeing much confidence yet in longer-term directionality bets, at least not in single-name books. Flows suggest preference for delta-neutral structures, with trades focusing more on gamma harvesting or capturing dislocations in IV–RV relationships. In general, betting on sustained trends right now is less justifiable given sensitivity to external triggers.
Keep one eye firmly on earnings revisions and the other on short-term economic beats. Both are likely to set pace for rates and commodities, but indirect effects on liquidity conditions—especially through T-bill issuance and reverse repo balances—could tell you more about underlying risk transfer mechanisms. Right now, changes in market depth are creating implied opportunities, but only for those willing to dig past surface moves.
