Tariff Merry-Go-Round Continues As Focus Falls On Fragile UK Fiscal Backdrop

WHERE WE STAND – Another day, another tariff story.

Bored of this yet? Me too! But, there’s still a week to go until the big day on 2^nd April, and no sign of the noise around the issue of trade quietening down any time soon.

Anyway, yesterday it was the FT’s turn to provide info on the tariff front, reporting that the Trump Admin are considering a “two-step tariff regime” for the start of next month. Said proposals, though, wouldn’t so much be a reprieve from tariffs, but instead be more of a technical tweak to the tariff programme to ensure a robust legal grounding for the levies. As a result, the reporting indicated that “emergency powers” could be invoked to apply tariffs immediately, while so-called ‘Section 301’ investigations into trading partners are launched, paving the way for longer-lasting tariffs to be implemented.

Cutting through all of the legal jargon, the underlying theme of these latest developments remains very much in keeping with the recent theme. Namely, that uncertainty on the tariff front remains ridiculously high, leaving it incredibly tough for businesses or consumers to plan more than about a day into the future, and still making it nigh-on impossible for market participants to price risk.

Furthermore, reporting of this ilk reinforces the idea that, rather than being the end of the tariff matter, so-called ‘Liberation Day’ could just be the start of things. As has been the case for some time, it is the uncertainty associated with policymaking, as opposed to the actual policies themselves, that are causing such consternation for market participants.

In any case, despite that uncertainty, sentiment was solid enough once more yesterday, with equities notching a third straight daily advance for the first time since early-Feb, and the S&P rallying further north of the all-important 200-day MA. I remain a rally seller, though, with the gains still feeling rather tentative in nature, and all of the recent upside liable to a sharp reversal if, or indeed when, negative news on the tariff front begins to emerge.

Uncertainty on that front, though, is clearly continuing to have a detrimental impact on the US economy, with all three of yesterday’s datapoints – new home sales, Richmond Fed manufacturing, and Conference Board consumer confidence – missing expectations, as the latter slipped to its lowest level in over four years. One wonders how long it will take for this to begin to show up in ‘hard’ data.

Those soft prints did, however, weigh on the dollar a bit, even if the G10 FX space right now seems stuck in a bit of a rut – the DXY languishing around 104, the EUR at 1.08, and cable in the mid-1.29s. Perhaps we need to wait for a bit of tariff clarity (I wish!), or next week’s US jobs report, to finally see these recent tight ranges break down, particularly with EoM/Q flows continuing to muddy the waters quite significantly.

The buck also faced headwinds yesterday from the gains seen across the Treasury curve, with the belly outperforming as 5-year yields fell as much as 4bp on the day, while the benchmark 2-year rallied back towards the 4% mark. Again, Treasuries are mean-reverting rather a lot right now, as we see sizeable moves each day, albeit within 20ish bp ranges across most of the curve, for the last couple of weeks.

This all smacks of a market desperate for some certainty, or an external catalyst, that could shake things up a little more.

LOOK AHEAD – All eyes on the UK today, amid a dearth of scheduled events elsewhere.

This morning’s CPI figures kick things off, with headline inflation set to have held steady at 3.0% YoY last month, though underlying price pressures should ease a touch, with core and services inflation seen at 3.6% YoY and 4.9% YoY respectively. Of course, no PPI figures will be released due to the ongoing shambles down at the ONS. The data, though, shouldn’t have a huge impact on the BoE policy outlook, particularly with another round of price data due before the next MPC meeting.

Of much greater impact will likely be this lunchtime’s ‘Spring Statement’, where Chancellor Reeves looks set to deliver around £15bln of spending cuts in order to restore the fiscal headroom that a Gilt sell-off, and anaemic economic growth, have eroded since the Budget last autumn. Said spending cuts will likely come from slashing the benefits bill, as well as spend in unprotected government departments (i.e., those outside of defence and health). Meanwhile, the year ahead Gilt remit should stand at around £310bln, with issuance likely to continue to be front-loaded.

That said, Reeves will be delivering out-of-date forecasts, with Gilt yields sitting around 20bp higher across the curve than when the OBR took their snapshot at the start of last month. Hence, the key question will be whether market participants believe Reeves’s spending cuts are enough, which seems a particularly tough ask for a Chancellor with next-to-no credibility in the market’s mind. Short Gilts, and short Reeves’s Cabinet career prospects, are my trades of choice here.

Elsewhere, today, participants will glance over the latest US durable goods orders report, as well as remarks from a handful of FOMC and ECB policymakers. US supply also continues today, with a 5-year sale due this afternoon.