Last week, the Trump administration announced new tariffs under Section 301 to replace expiring Section 122 universal 10% tariffs. A transition to Section 301 from Section 122 tariffs will likely increase the average effective tariff rate by about 1pp to 8%. We continue to expect that increased focus on affordability issues and elevated inflation will likely prevent US tariff policy from escalating drastically going forward. Our expectation for terminal average effective tariff rate is at 8-9% range. Also, details of the new tariff announcements indicate a rising share of exempted items. We do not view last week's announcements as a sign of escalation in US tariff policy. . Most trade law experts view the section 301 tariffs to be on somewhat firmer legal ground, but that likely will not preclude legal challenges to the forced-labor and excess capacity justifications offered for the most recent actions. To summarise, we do not expect any material change in US tariffs now since mid-term elections are very close. Also, the rise in gasoline prices above $4 levels implies a constrained US consumer spending capacity, thus making tariff related price increases a hot political issue which Trump might want to avoid at least till Nov’26. The above view adds to our conviction that Fed is likely to remain on hold for REMCY26. We are currently received half risk at 4.15 in 1yr-1yr US SOFR and another half risk waiting to get received at 4.25. This week’s high was 4.23 before it cooled down to close at 4.20. We have a profit target of 3.9 and stop loss at 4.4 for this trade.
