Tariffs Trigger A Shaky Start To The Week

WHERE WE STAND – Something of a shaky start to the week, yesterday, as fallout from President Trump’s weekend EU & Mexico tariff announcements continued.

The difficulty here is that, while everyone knows that those tariff letters are almost certainly a negotiating gambit, and that the new levies are highly unlikely to come into effect, we must all still discount even a slim possibility of all this actually coming to pass. Frankly, there is no participant out there who, on 1^st August, wants to be having an awkward conversation with their risk desk, trying to explain why they didn’t hedge possibly the most obvious risk on the horizon right now.

In any case, at least in the equity complex, participants were content that they’d adequately hedged by about mid-afternoon here in London, at which point dip buyers re-emerged en masses, seeing major Wall Street benchmarks end the day in the green, with tech leading the gains. In my mind, the path of least resistance continues to lead higher, amid the likely progress towards trade deals, coupled with solid underlying economic and earnings growth. All that keeps the bull case intact, and results in dips remaining as buying opportunities.

Action in the FX space, though, was somewhat less optimistic. The common currency drifted lower for much of the day, not helped by some relatively cautious ECB ‘sources’ stories alluding to the possibility of another rate cut, albeit not until the September meeting. Somewhat by default, this EUR weakness saw the greenback gain some ground, though those gains were seen against most G10 peers, most notably the quid, where the grim fiscal reality appears to finally be dawning.

That aside, I still don’t see especially much to like about the greenback here, as political uncertainty in DC persists, and as Trump & Co continue to grumble about Chair Powell, while slowly but surely eroding monetary policy independence. The buck remains a sell on rallies to me.

Overall, though, if we’re to make the assumption that this is all setting up for another TACO moment, then it remains Treasuries that rule the roost in determining when such a moment might come to pass. In relatively crude terms, Trump has probably 5% or so of downside in spoos to play with before anyone starts to panic too much, but likely less than 5bp of upside in the benchmark 30-year yield before fear sets in.

We once again saw that 30-year yield come within inches of the 5% mark yesterday, though dip buyers emerged in relatively rapid fashion, with said demand seen most notably at the long-end of the curve. Still, while locking in yields at this level remains an attractive prospect, a convincing move north of that 5% mark does seem to have a bit of an air of inevitability about it.

Perhaps, that will be the real trigger for the TACO trade to come back with a vengeance.

LOOK AHEAD – A busy docket awaits today.

Last month’s US CPI figures highlight proceedings, with the data likely to show the first evidence of tariff-induced price pressures beginning to emerge. Both headline and core CPI are seen rising to their highest annual rates since February, at 2.6% YoY and 2.9% YoY respectively, both vindicating the FOMC’s ‘wait and see’ approach to monetary policy. An approach that, even in the event of a hugely cooler than expected print, will persist at the July confab in a couple of weeks.

Elsewhere, the latest German sentiment surveys are due from the ZEW institute, with the expectations metric seen rising to 50.4, its highest level since March. We’ll also receive eurozone industrial production figures for May, as well as last month’s Canadian CPI report, where the headline metric is set to remain beneath the midpoint of the BoC’s target range.

Besides that, plenty of speakers are due, including four FOMC members, as well as BoE Governor Bailey, who will give his annual Mansion House address. Chancellor Reeves will also be speaking at that gathering, apparently to ‘insist’ that she has a grip on the UK economy; a remark which, frankly, doesn’t fill you with confidence.

Lastly, Q2 earnings season gets underway today, with the likes of JPMorgan Chase (JPM), Wells Fargo (WFC), and Citi (C) kicking things off before the market open.