Tariff Headlines Eyed As Traders Punt On Another TACO Moment

WHERE WE STAND – Put simply, where we stand this morning is very similar to where we stood this time yesterday.

Markets have, by and large, taken the latest round of Trump tariff threats in stride, believing that the letters sent on Monday to 14 trading partners, and the extension of the negotiating deadline to 1^st August, are both simply a negotiating gambit aimed at speeding things along, escalating to de-escalate, and ensure deals (read frameworks/agreements/memoranda of understanding) get completed in shorter order.

The setup again seems ripe for a TACO moment, though there is understandable concern in some quarters that markets could be getting somewhat too complacent. After all, if (big IF) those tariff levels outlined yesterday come into effect, that would push the average effective US tariff rate towards the high-teens, not far off the level we were talking about on ‘Liberation Day’ in early-April. Back then, folk screamed Armageddon, and fretted about a US recession. Why, then, are folk not doing the same now?

Put simply, markets have not only grown somewhat immune to the tariff noise, but participants are also happy to buy into the idea that Trump is bluffing. After all, everyone has seen this film enough times already in the last six months to know that such a ploy is the most likely scenario. While there’s a chance the new tariff threats could well come to fruition, and some downside protection could be worthwhile as a result, so long as the former view holds water, the path of least resistance for equities should continue leading higher.

As for markets yesterday, equities pretty much trod water, though the most interesting moves on the day were to be found elsewhere.

Treasuries sold-off across the curve, most notably at the long-end, with at one stage the benchmark 30-year yield rising well over 5bp, and getting within touching distance of the 5% handle once again. I still think that this will be a level at which dip buyers are likely to emerge, though the poorly received 3-year sale doesn’t exactly inspire confidence for the long-end auctions due later in the week.

Speaking of FI, the OBR had some spiffing news for us here in the UK yesterday, forecasting that the debt/GDP ratio will exceed 270% by the early-2070s. I’ll be a mere 72 by then, so reckon I’ll be around to see that happen, while also reckoning that Chancellor Reeves has no plan whatsoever to get things back under control. While this is, perhaps, not new information, it nevertheless underscores the perilous fiscal footing that we continue to experience here in Blighty, which seems set to get worse before things improved.

While the quid faced some headwinds intraday, this was more a story of USD demand than anything else. In truth, though, the G10 FX market was again relatively subdued, with participants still lacking a concrete narrative to latch onto, given the seemingly endless can kicks when it comes to the Trump Admin’s tariff deadlines.

Cutting out all the noise, the balance of risks, in my view, still leads lower for the greenback, especially amid continued policy volatility in Washington DC, and as Trump continues to erode the idea of monetary policy independence. 1.20 in the EUR, and 1.40 in cable, remain my longer-run targets.

LOOK AHEAD – The data docket is again barren today, there’s definitely something of a theme developing here as the week goes on, especially with trade headlines to remain in focus.

The only items of note come very late in the day here in the UK, firstly with a 10-year Treasury auction, followed by minutes from the June FOMC meeting. The latter will likely be a dull affair, particularly with a July cut now firmly off the table, though the former will be of interest amid ongoing fiscal jitters, and ahead of tomorrow’s pivotal 30-year sale. A poorly-received auction will only serve to re-ignite concerns over the unsustainable path of US borrowing.