“Temu tax” time

Daily update

The US “Temu tax” takes effect at midnight, whereby US consumers pay their government for the privilege of buying low cost products directly from China. The tax is unlikely to show up in consumer price data (it is doubtful that Temu prices are used in the calculation), but it is a visible price increase to many US consumers—a reminder that they, not exporters, pay trade tariffs.
This visible trade tax effect will pressure the US administration to do a trade deal—any trade deal. China’s government suggested the US has been calling, and the EU trade commissioner has hinted at a deal. While markets will regard this as reducing downside tail risks, uncertainty over trade has already done economic damage. Every published response in the ISM manufacturing sentiment poll mentioned tariffs.
The economics of tariffs work through the following order: 1. Sentiment damage; 2. Jobs in ports and trucking are lost, other companies stop hiring; 3. Inflation rises, weakening spending power; 4. Companies respond to slower demand. The US is somewhere between stages 1 and 2, limiting the effect in today’s employment report.
Eurozone May inflation is not likely to be much of a market focus as investors are anticipating future disinflation forces (foreshadowed by oil prices).