Tariffs could lead to short-term economic overheating
Long-term impact could be negative for stocks, credit
By Davide Barbuscia
NEW YORK, Feb 3 (Reuters) - U.S. President Donald Trump's willingness to calibrate economic policies based on market signals will be key for U.S. inflation and growth prospects, PIMCO's Chief Investment Officer Dan Ivascyn said on Monday, after tariffs on U.S. trade partners roiled markets.
Investors on Monday scrambled to make sense of escalating trade tensions after Trump announced broad tariffs on Mexico, Canada, and China over the weekend. By Monday, he temporarily halted Mexico’s tariffs following a border security deal, while those on Canada and China remained on track.
Markets were whipsawed by tariffs news, with stocks selling off initially but then paring some of their losses after news of a month-long tariff suspension with Mexico.
"We're really trying to just understand the degree to which the Trump administration is willing to calibrate policy based on market signals and the actual data," said Ivascyn at PIMCO, a bond-focused investment firm with about $2 trillion in assets.
"Even independent of the tariffs decision, we have an economy where inflation is still above target," he said in an interview. "Some of Trump's policies ... could be positive for growth long-term, but could lead to a little bit of inflationary pressure or risk of some overheating in the short term."
Analysts estimate tariffs may fuel inflation while dampening economic growth and corporate earnings.
The risk of an aggressive tariffs approach, in addition to stoking price pressures, could be retaliation from trading partners, which could lead to a "meaningful hit" on U.S. growth, said Ivascyn.
"In the extreme form, it likely would be negative for risk assets and probably on the margin a little bit positive for bonds," he added.
U.S. long-term Treasury yields declined on Monday as investors sought cover in the safety of government debt amid tariff volatility. Yields move inversely to prices.
On the other hand, short-term Treasury yields, which more closely reflect expectations of monetary policy changes, rose as investors assessed whether price pressures could prompt a long pause on rate cuts from the Federal Reserve.
Ivascyn said an environment of high interest rates for longer than anticipated due to elevated inflation could be bad for equities and corporate bonds, prompting him to add interest rate exposure through longer-dated Treasuries in recent months.
"Inflation already continues to be elevated, and if you look at market pricing, there's just a lot of optimism embedded in risk asset valuations," he said. "This is a tricky environment."
(Reporting by Davide BarbusciaEditing by Marguerita Choy)
((Davide.Barbuscia@thomsonreuters.com; +1 917 285 3067;))
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