Trump Caves

WHERE WE STAND – Just one normal and calm-ish day. Please. It’s all that I, and other market participants are asking for right now.

So, yesterday, we definitely didn’t get that!

In short – Trump did his best impression of Tottenham Hotspur FC, and bottled it under pressure. As stocks teetered on the brink of a bear market, and Treasuries sold-off across the curve, he caved on his signature tariff policy.

It seems that, contrary to many public protestations that he doesn’t pay attention to equity markets, he does. Despite multiple assertions that ‘reciprocal’ tariffs weren’t a negotiating measure, they were.

What am I on about here? Well, of course, it was another day of to-and-fro on the tariff front, which is all getting rather tiresome by this point.

Anyway, we kicked things off with China raising tariffs on US goods imports to 84%, mirroring exactly those tariffs imposed by the US – 34% ‘reciprocal’ tariff, plus the 50% additional rate announced earlier in the week.

More important than that, though, was what President Trump had to say.

Predictably, he hit back at those China measures, raising the tariff on imports to 125% with immediate effect. Of much more significance, though, was news that Trump would suspend, for 90 days, the ‘reciprocal’ levies imposed on all countries that had not retaliated against the measures that he announced on ‘Liberation Day’, imposing just the baseline 10% import levy during that period.

I guess, then, we can mark 5% on the 30-year and 4,832 in Spoos as the strike prices for the ‘Trump put’, and the latter probably as the low for the time being as well. The correction was fun while it lasted. Actually, no, it wasn’t fun whatsoever, but I digress.

That said, while the face-ripping relief rally on Wall Street after the announcement of a tariff pause was staggering in both its scale and speed, with the S&P 500 adding 9.5%, and the Nasdaq 100 surging about 12%. I do still see some reason for caution here, even if we have probably (I stress, probably) avoided the worst case scenario on the trade front.

Firstly, policy continues to be made in an utterly random and incoherent nature. After pushing tariffs for about 4 decades, Trump has folded like a cheap suit within a week. This will do nothing in terms of his credibility, and also leaves everyone with a nagging doubt that this flip-flopping will continue.

Secondly, while an off ramp has now been presented, it remains to be seen whether trade deals can be struck during that 90-day period, as well as what happens in three months’ time. If deals aren’t struck, or if nations somehow get on the wrong side of Trump in the meantime, you can certainly imagine tariffs being ramped up once more.

Thirdly, and the biggest elephant in the room, is China. While this might now be a US-China trade conflict, not an all-out global war, a 125% tariff on imports from your biggest trading partner still isn’t exactly going to do the US economy any favours. That will still cause a substantial hit to growth, and present a substantial upside inflation impulse as well.

Fourthly, a 10% baseline tariff on every single import into the US will still be a significant hit to the economy, and to earnings growth, particularly when businesses believe their ability to pass costs on to the consumer is severely limited. The effective tariff rate under this ‘new’ regime isn’t far off what it was under the ‘old’ one from 24hrs ago, just much more heavily weighted towards imports from China.

So, while momentum has certainly flipped violently back in favour of the bulls, I think we’re very far from a point where we can say that all is ‘fine and dandy’ once again for financial markets, or the economy at large. Dip buying has become a more attractive prospect, though a durable rally is probably going to need to see some trade deals being struck, in order not only to prove that the off ramps are indeed being taken, but also so that they can serve as a blueprint for other nations to follow.

The implications of all this for the FX, and FI spaces will take some time for participants to figure out, though at least a degree of positivity on the trade front should alleviate some of the stresses that appeared to be cropping up in Treasuries early in Wednesday’s session.

I’m not entirely convinced though, that this is all going to be some massive boon for the dollar, particularly when participants were already fretting over the incoherence of the way in which policy was being made, and this only serves to add to those concerns. This continued incoherence, I guess, should also help keep the bull case for gold relatively solid too.

Anyway, on the whole, we’ve all just wasted an entire week of our lives following this nonsense, with trillions of dollars in capital unnecessarily wiped out, and everyone feeling a decade older, all to achieve something that could’ve been done without any of this in the first place. Plus, worst of all, my hairline has receded even further!

All told, what a completely and utterly pointless exercise.

If anyone needs me, I’ll be lying down in a dark room somewhere trying to forget than any of this ever happened.

LOOK AHEAD – Because there’s not already enough going on in the world, we have some good  old fashioned event risk up ahead today, with the March US CPI figures due.

On its own, the data seems unlikely to move the needle especially much, with headline CPI seen falling to 2.5% YoY, and core seen dipping a touch to 3.0% YoY. Clearly, the figures are rather stale given how significantly the outlook has shifted since the survey period. In any case, a hotter-than-expected print will certainly be poorly received, as it would point to price pressures being more intense than thought, just as a huge bout of upside inflation risk hits the economy.

Quantifying that inflation risk remains difficult, but a ‘back of the envelope’ calculation says that a 125% China tariff should increase CPI by 1.1pp or so, before even considering any other tariffs that Trump has thrown around. Of course, that rudimentary maths doesn’t account for any potential slowdown in imports due to tariffs, or drop in demand as a result of the increase in prices. Still, we’re probably looking at CPI getting somewhere near 4-5% over the next couple of quarters.

Besides that, a handful of Fed speakers litter the economic calendar, while the weekly US jobless claims figures are also due. Finally, this week’s Treasury supply wraps up with a 30-year sale at 6pm London.