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Investing.com -- President Donald Trump’s temporary pause on tariffs drew a chorus of cheers across markets, but not much has changed since the ’Liberation Day’ reciprocal tariffs wreaked havoc, keeping the risk of recession front and center, Morgan Stanley (NYSE:MS) warned in a recent note.
"The revised plan lowers the effective blended tariff rate from around 22% to 17%, but that’s still a dramatic rise from the current rate of 3% – an increase that’s likely to weigh on economic growth, corporate margins and consumer behavior," Morgan Stanley said in a recent note.
Last week, Trump sent markets soaring after announcing a 90-day pause on reciprocal tariffs, and lowering tariffs on trading partners who hadn’t retaliated against the ’Liberation Day’ Apr. 2 tariffs to 10%.
China, however, wasn’t offered reprieve. Instead, the Trump administration decided to escalate its trade war with Beijing—a move that could likely prove economically costly"
" Independent (LON:IOG) analysts at Pantheon Macroeconomics estimate that China’s roughly 7% share of U.S. exports will likely decline to zero, potentially shaving around 35 basis points from U.S. GDP growth," Morgan Stanley said.
The Trump administration has touted an expansionary fiscal plan including tax cuts to support the economy, but the surge in the Treasury market indicates that there will be higher borrowing costs that could narrow the scope to roll out fiscal support.
"With the U.S. budget deficit already outsized, higher rates and, thus, higher interest expenses may limit what Washington can do in the federal budget. That likely includes how ambitious U.S. lawmakers can afford to be with proposed tax cuts," Morgan Stanley said.
Against the backdrop of ongoing tariff uncertainty, which suggests volatility will likely persist, Morgan Stanley recommends increasing holdings in short-term fixed income and real assets.