17 April 2025
China’s trade war defense, bond markets riding the storm and US labor market during a recession
Summary
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In summary:
Trade war: Can China play defense?
The US administration's latest exemptions on products such as laptops, tablets and smartphones will bring some relief to Asian exporters but the tariff rate on China remains at an eye-watering 103% (-27pps). To mitigate the impact, Chinese companies can consider rerouting through neighboring countries or deflecting to other export markets. While in theory, there is capacity to reroute up to 64% of Chinese exports usually bound to the US, it would put strains on other Asian ports, global supply chains and maritime shipping. Over the next three years, trade diversification could see imports from China rise by up to +6% annually in the EU, the UK, Vietnam, Taiwan, Malaysia, Indonesia, Mexico, Singapore, Saudi Arabia and Nigeria. But ultimately US companies in the electronics, household equipment and textiles sectors cannot do without China's manufacturing given critical dependencies. While geopolitical concerns may spare companies in the electronics sector, those in textiles may not be so lucky and could face a hit on margins.
Bond markets are riding the storm.
Tariff hikes triggered a historic bond market repricing: US yields surged (30-year up by +46bps in one week), the USD depreciated and German yields fell, signaling a possible shift in global investment away from US assets. While who is selling remains speculative, institutional investors from countries in the crosshairs of Trump's foreign policy (notably China) do have an incentive. Looking ahead, despite volatility, we continue to see the US 10-year yield stabilizing around 4.0% by the end of 2025, driven by monetary easing and weak economic growth. The EUR/USD exchange rate is also still likely to move towards 1.12 by year-end as capital flows rebalance and real interest rate differentials narrow. The ECB is poised to cut policy rates by 25bps in each of its upcoming meetings, down to 1.5% by September 2025, moving into accommodative territory as inflation will fall below target and a negative output gap persists.
The US job market: how much can it weaken?
The US labor market has held up despite mounting economic headwinds, and forward-looking indicators suggest this resilience should continue in Q2 2025. The job vacancy rate will be the first to signal a recession (expected in Q2-Q3) but we do not expect large layoffs. The US economy faces a unique combination of supply constraints (more than conventionally thought) and increasingly tight immigration policy. Hence, companies are more likely to hoard scarce labor compared to previous recessionary episodes, preventing a surge in unemployment. Additionally, record profits offer a buffer to bear the tariffs for now. Nevertheless, we expect the unemployment rate to peak at 5% by Q1 2026. But the DOGE-driven federal layoffs are not likely to shake up the labor market: even if dismissed or quitting federal employees do not find another job (but stay in the labor force), this alone would push up the unemployment rate by just +0.3pp in 2025. The steady deterioration of the labor market is a reason why we expect the Fed to accelerate rate cuts in end 2025-early 2026 after a tariff-induced inflation spike in the summer.
Authors
Maxime Darmet
Allianz Trade
Allianz Trade
Françoise Huang
Allianz Trade
Allianz Trade
Maria Latorre
Allianz Trade
Allianz Trade
Sivagaminathan Sivasubramanian
Allianz Trade
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Weekly on Allianz markets, macro, sector & insurance research by Ludovic Subran
