Temporary Trump Tariff Reprieve

WHERE WE STAND – All eyes yesterday, naturally, fell on Donald Trump’s inauguration as 47^th President of the United States, as Trump became only the second man to serve two non-consecutive terms in the Oval Office.

For markets, though, the ‘fun and games’ came before the oath of office had even been read.

Amid a continued focus on Trump’s likely trade policies, it was reporting via the WSJ which dented the dollar, and gave risk appetite a fillip mid-afternoon on Monday, in moves that were likely exacerbated by thinner-than-usual trading conditions, with US participants away for MLK Day.

Those reports, which were later reinforced by similar comments via Reuters, noted that Trump planned to lay out his “trade vision” on Day 1 of the Administration, but would refrain from the imposition of any tariffs “at this stage”. Instead, government agencies will be directed to “investigate and remedy” persistent trade deficits, with a particular focus on China, Canada, and Mexico.

Clearly, that language is rather ominous, with it being important to remember that just because there are no tariffs on day 1, that doesn’t mean that there will be not tariffs whatsoever at any point in the future. It’s relatively easy to envisage those ‘investigations’ concluding that tariffs are the only way to remedy said trade deficits. In fact, President Trump noted in his inaugural address that the US will “tariff and tax foreign countries”, while overnight flagging the possibility of enacting tariffs on Mexico and Canada on 1^st February.

Anyway, that nuance was rather lost on participants yesterday, as equity futures vaulted higher, before paring gains, and the dollar dived, in a move that was likely driven largely by positioning, as ‘worst case scenario’ hedges were unwound en masse.

Consequently, the front S&P future rallied further north of the 6,000 mark, while the dollar lost ground against all major peers, as the DXY slipped back under the 108 handle. In the G10 FX universe, gains were most significant against those currencies that could prove most vulnerable to potential tariffs – namely, the EUR reclaiming the 1.04 mark, and the CAD touching its best levels in a month.

Despite these moves, I remain a firm believer in the dollar bull case, with the ‘US exceptionalism’ narrative remaining a strong one, and with the FOMC continuing to adopt a considerably more hawkish stance than that of their G10 peers. The buck, hence, remains a ‘buy on dips’ in my view.

More broadly, yesterday’s news flow helps to underscore a couple of pre-existing views of mine.

Firstly, Trump’s focus, and success gauge, is the performance of financial markets, namely Wall Street equities; with boosting equities, and economic growth, Trump’s top two priorities, starting a wide-ranging trade war that dents the solid existing equity bull case would seem counter-intuitive.

Secondly, welcome back to headline trading! A Trump Administration, as we saw in 2017-21, means government by tweet, policymaking on a whim, conflicting sources reports galore, a cacophony of noise, and precious little signal. Participants will struggle to discount a concrete future policy path, simply because such a concrete path shan’t exist. All-in-all, the net result is considerably greater uncertainty, thus leading to considerably higher cross-asset volatility.

These themes, importantly, are not ones that will fade after a couple of days, or a couple of months, but are likely to be the over-arching aspects of the next four years.

LOOK AHEAD – A busy-ish data docket awaits today, as focus also remains on President Trump’s further policy proposals, and executive orders, that will be put forward over coming days.

Kicking things off this morning is the latest UK labour market data, with unemployment seen ticking higher to 4.4% in the 3 months to November, while overall pay is seen rising 5.7% YoY over the same period, largely due to the summer’s public sector pay rises feeding into the figures. Nevertheless, despite the ONS having spent over £40mln on ‘transforming’ the labour force survey, the figures remain inaccurate, and are likely to be so for another couple of years yet. It’s, therefore, tough to imagine the data materially shifting the BoE policy outlook.

Elsewhere, inflation figures are due from Canada, and from New Zealand, with the figures likely to cement expectations for a 25bp BoC cut later this month (currently 75% priced), and a 50bp RBNZ cut in February (currently 85% priced). The latest German ZEW sentiment surveys are also due, likely painting a pessimistic picture of Europe’s largest economy once more.

Lastly, earnings season resumes as US participants return from yesterday’s holiday, with today’s notable reports including Netflix, United Airlines, and bellwether stock 3M.