Optimism Fizzles As Dust Settles On Tariff Court Ruling

WHERE WE STAND – It would appear that ‘turnaround Thursday’ is now a thing, at least given the price action seen yesterday.

The day kicked off with what looked like a good, old-fashioned, risk-on vibe across the board, as participants cheered solid earnings from Nvidia, and reacted positively to the Court of International Trade’s decision to place a block on some of Trump’s tariff measures.

That, though, rather fizzled out as trade went on, particularly as the dust settled on that tariff-related court ruling.

Having spent most of the day churning through various legal texts, I’d summarise the implications of the ruling thus – the route that the Trump Admin must take is now different, but the destination is unchanged.

To recap, the Court of International Trade ruled early Thursday that the President’s use of emergency powers, under the IEEPA, to impose a host of tariffs and bypass Congress, was unjustified. Consequently, tariffs that were imposed using this authority, namely the ‘reciprocal’ tariffs on ‘Liberation Day’, as well as levies on China, Mexico, and Canada are no longer valid, with tariff collection needing to be halted within 10 days of the ruling. Sectoral tariffs, on autos, steel, and aluminium are unaffected.

However, this does not in any way mean that the Trump Admin’s tariff plans must come to a complete end. Firstly, appeals to the ruling will be made, likely all the way up to the Supreme Court, with the tariffs set to remain in place, as previously announced and under the IEEPA provision, while the appeals process proceeds.

Besides appeals, there are numerous other legal mechanisms by which tariffs could be imposed, including Sections 122, 232, 301 & 338. Without going into the weeds of those specific measures, the nub is that, while various investigations and reports would need to be conducted to enact levies using those provisions, they would permit Trump to implement tariffs, without the need for Congressional involvement.

Hence, the ‘endgame’ for most countries, and most sectors, is likely unchanged as a result of the ruling – AKA different means, same ends. That said, the ruling does somewhat lessen the possibility of ‘tariff by tweet’ going forwards, while also somewhat raising the likelihood of an increased focus on sectoral tariffs, given them being easier to enact given the aforementioned provisions.

As all the above slowly became clear, and sunk in, some of the early positivity that had swept over markets began to fade, with this fading exacerbated by both initial and continuing jobless claims prints topping the forecast range. The latter of these is of more concern as, not only does it coincide with the May NFP survey week, it also stands at a cycle high, implying that it is taking longer for those losing their jobs to return to employment.

Taking all of that into account, it was perhaps unsurprising to see the overnight euphoria that had dominated the equity complex fade, as calmer heads prevailed, and participants realised that the trade situation, in reality, hadn’t really changed much.

I remain a dip buyer here, with the bull case of solid earnings, decent economic data, and being passed the point of peak trade uncertainty still holding firm. A closing break above 6k in spoos would put new highs on the cards, with the market having tagged that level intraday yesterday.

I had a few questions on that ‘peak uncertainty’ view in the aftermath of yesterday’s legal shenanigans. While I agree that they are clearly another headline to contend with, as noted above what’s changed here is the mechanism and not the measure, i.e. tariffs themselves. Regardless of what the courts have said, the overall direction of travel remains one towards cooler rhetoric, and deals being done, as opposed to the opposite seen at the start of last month.

A pretty dramatic reversal in fortunes was also on the cards elsewhere – the greenback ending with notable losses vs. all G10 peers, paring overnight gains; Treasuries ending the day firmer, led by the belly, giving back earlier losses; and gold ending in the green, having once again held on a test of the 50-day moving average to the downside. All these round-trips, somewhat obviously, provide a lot more ‘noise’ than ‘signal’, especially with the FX space still especially messy as a result of EoM flows.

My overall biases are still towards some short-term Treasury gains as we cruise towards next Friday’s NFP print, and to remain long of gold, buying on any dips. It’s much harder to have a high conviction view on the FX space right now, with the market seemingly just in a mean reversion mindset for the time being, and the DXY seemingly content to plod along in a 98 – 102 range. Frankly, I shan’t be holding my breath for that to break any time soon.

LOOK AHEAD – It’s finally Friday, and very nearly time for a few cold ones to close out the week.

Before that, though, there are a few orders of business to churn through on today’s data docket, most notably the latest PCE inflation figures from the States. The data – the Fed’s preferred inflation metric – is unlikely to move the needle especially much as policymakers remain firmly in ‘wait and see’ mode, though should still reinforce the disinflationary path that the US economy is on, with core PCE seen falling 0.1pp to 2.5% YoY.

Meanwhile, we also receive the latest Chicago PMI figures, and final UMich sentiment data, with the latter having the potential for a chunky revision bearing in mind that the prelim print, which at 50.8 was the 2^nd lowest reading on record, was surveyed largely before the US-China trade truce was announced.

Elsewhere, Q1 GDP is due from Canada, ‘flash’ inflation figures drop from Germany ahead of the eurozone-wide data early next week, while a panoply of ECB speakers are set to make remarks, though all will likely be in favour of another 25bp cut next Thursday.

Finally, the standing reminder about potential weekend gapping risk continues to apply, pending potential geopolitical, or trade-related events while markets are closed.