Seems tariffs no longer concern
The markets, as mostly they yearn
For Jay and the Fed,
When looking ahead
To cut rates when next they adjourn
 
Alas, there’s no hint that’s the case
As prices keep rising apace
In fact, come this morning
There could be a warning
If CPI starts to retrace

 

I am old enough to remember when President Trump’s actions on tariffs combined with DOGE was set to collapse the US economy.  I’m sure that was the case because it was headline news every day.  Equity markets fell sharply, the dollar fell sharply, gold rallied, and the clear consensus was the “end of American exceptionalism” in finance.  That was the description of how investors around the world flocked to the US equity markets as they held the best opportunities.  But the punditry was certain President Trump had killed that idea and were virtually licking their lips writing the obits for the US economy and President Trump’s plans.  In fact, I suspect all of you are old enough to remember that as well.  The chart below highlights the timing.

Source: tradingeconomics.com

But that is such old news it seems a mistake to even mention it.  The headlines this morning are all about how the stock market is now set to make new highs!  Bloomberg led with, Traders Model Bullish Moves for S&P 500 With Tariff Tensions Easing, although it is the theme everywhere.  So, is the world that much better today than a month ago?  Well, certainly the tariff situation continues to evolve, and we have moved away from the worst outcomes there it seems.  But recession probabilities remain elevated in all these econometric models, with current forecasts of 35%-50% quite common.  

Is a recession coming?  Well, the same people who have been telling us for the past 3 years that a recession was right around the corner, and some have even said we are currently living through one, are telling us that one is right around the corner.  Their track record isn’t inspiring.  In fact, these are the same people who are telling us that store shelves will be empty by the summer.  Personally, I take solace in the fact that the underlying numbers from the Q1 GDP data showed that despite a negative outcome, the positives of a huge increase in private investment and a reduction in government spending, were far more important to the economy than the fact that the trade deficit grew as companies rushed to stock up before the threatened tariffs.  Less government spending and more private investment are a much better mix for the economy’s performance going forward.  Let’s hope it stays that way.

But what about prices?  This morning’s CPI data (exp 0.3%, 2.4% Y/Y Headline, 0.3%, 2.8% Y/Y Core) will give us further hints about how the Fed will behave going forward.  As of now, there is no indication that the Fed is concerned about a growth slowdown of such magnitude that they need to cut rates.  In fact, Fed funds futures have reduced the probability of a June cut to just 8% and have reduced the total cuts for 2025 to just 2 now, down from 3 just a week ago.  Yesterday, Fed Governor Adriana Kugler reiterated the old view that tariffs could raise prices and reduce growth although gave no indication that cutting rates was the appropriate solution.  Arguably of more importance to the market will be Chairman Powell’s comments when he speaks Thursday morning.  My take here, though, is that the rate of inflation has bottomed and that the Fed is going to remain on hold all year long.  In fact, as I wrote back in the beginning of the year, I would not be surprised to ultimately see a rate hike before the year is over.  A rebound in growth and inflation remaining firm will change the narrative before too long, probably by the end of summer.  Of course, remember, I am just a poet and not nearly as smart as all those pundits, so take my views with at least a grain of salt.

Ok, let’s look at how markets have behaved in the new world order.  Yesterday’s massive US equity rally did not really see much follow through elsewhere although the Nikkei (+1.4%) had a solid session.  In fact, the Hang Seng (-1.9%) saw a reversal after a string of 8 straight gains as both profit-taking and some concerns about slowing growth in China seemed to be the main talking points there.  Elsewhere in the region, Malaysia and the Philippines had strong sessions while India lagged.  

In Europe, other than Spain’s IBEX (+0.8%), which has rallied purely on market internals, the rest of the continent and the UK are virtually unchanged this morning.  The most interesting comment I saw was from Treasury Secretary Bessent who dismissed the idea that a trade deal with the EU would be coming soon, “My personal belief is Europe may have a collective action problem; that the Italians want something that’s different than the French. But I’m sure at the end of the day, we will reach a satisfactory conclusion.”  That sounds to me like Europe is not high on the list of nations with whom the US is seeking to complete a deal quickly.  Finally, US futures are a touch softer this morning, although after the huge rallies yesterday, a little pullback is no surprise.

In the bond market, Treasury yields have backed off 2bps this morning, but in reality, they are higher by nearly 30bps so far this month as you can see below.

Source: tradingeconomics.com

This cannot please either Trump or Bessent but ultimately the question is, what is driving this price action?  If this is a consequence of investors anticipating faster US growth with inflation pressures building, that may be an acceptable outcome, especially if the administration can slow government spending.  But if this is the result of concern over the full faith and credit of the US government, or a liquidation by reserve holders around the world, that is a very different situation and one that I presume would be addressed directly by the Trump administration.  As to European sovereign yields, today has seen very modest rises, 1bp or 2bps across the board.  The biggest news there was the German ZEW survey which, while the Current Conditions Index fell to -82, saw the Economic Sentiment Index jump 39 points to +25.2, far better than expected.  It seems there is a lot of hope for the rearmament of Germany and the economic knock-on effects that will may bring.

In the commodity markets, oil (+0.6%) continues to grind higher as it looks set to test the recent highs near $64/bbl and from a technical perspective, may have put in a double bottom just above $56/bbl.  There is still a huge gap above the market that would need to be filled (trading above $70/bbl) in order to break this downtrend, at least in my mind.  But that doesn’t mean we can’t chop back and forth between $60 and $65 for a long time.  As to gold (+0.7%) after a sharp decline yesterday as the world was no longer scared about the future, it is bouncing back.  Whether this is merely technical, and we are heading lower, or yesterday’s price action was the aberration is yet to be determined.  Meanwhile, silver (+1.3%) and copper (+1.0%) are both having solid sessions as well.

Finally, the dollar is giving back a tiny bit of yesterday’s massive gains.  The euro (+0.2%) and pound (+0.25%) are emblematic of the overall movement although we have seen a few currencies with slightly stronger profiles this morning (SEK +0.8%, AUD +0.6%, CHF +0.5%).  In the EMG bloc, the movement has actually been far less impressive with ZAR (-0.45%) and KRW (-0.4%) bucking the trend of dollar softness but gains in MXN (+0.4%) and CZK (+0.4%) the best the bloc can do.  

One thing I will say about this administration is they have the ability to really change the tone of the discussion in a hurry.  If they are ultimately successful in reordering US economic activity away from the government and to the private sector, that is going to destroy my dollar weakness thesis.  I freely admit I didn’t expect anything like this to happen, but the early evidence points in that direction.  We will know more when Q2 GDP comes out and we find out if private sector activity is really increasing like the hints from Q1.  If that is the case, then the idea of American exceptionalism is going to make a major comeback in the punditry, although I suspect markets will have figured it out before then.

Other than the CPI, there is no other data and there are no Fed speakers on the docket.  While the dollar is soft this morning, I expect that any surprises in CPI will be the driver.  Otherwise, as I just mentioned, I am becoming concerned about my dollar weakness view.

Good luck

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