The story today is the court
And how it was able to thwart
The president’s aim
To alter the frame
Of trade, local firms, to support
 
Investors, though, cheered at the news
As tariffs had caused them to lose
Their faith that the Fed
Would cut rates ahead
Thus, ending the Bond Market Blues

 

I’m no attorney and so I have no opinion as to the legality of President Trump’s tariff impositions and whether they fit within the International Emergency Economic Power Act.  However, the Court of International Trade ruled that his tariffs were illegal and must be voided.  It was immediately appealed by the administration, so this fight is far from over.  You can be sure it will head to the Supreme Court.

However, within the extraordinary mass of US legislation on the books, there is at least one other way for President Trump to achieve his aims.  Within the still operational Trade Act of 1930, more commonly known as the Smoot-Hawley tariffs, is a key section, 338, with very clear presidential authority.  As per Law360, the below describes the law and the president’s powers accordingly:

Section 338 permits the president to impose “new or additional duties” of countries that have discriminated against commerce of the United States. Section 338 authority is triggered when the president finds that a foreign country has either (1) imposed an “unreasonable charge, exaction, regulation, or limitation” on U.S. products which is “not equally enforced upon the like articles of every foreign country”; or (2) “[d]iscriminate[d] in fact” against U.S. commerce “in respect to customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition” so as to “disadvantage” U.S. commerce as compared to the commerce of any foreign country.

Whenever the president finds such discrimination, Section 338 authorizes him to impose additional duties of up to 50 percent of the product’s value. If a country continues to discriminate against U.S. goods, the president may then move to block imports from that country.

It would be a great irony if President Trump’s invocation of old laws that remain on the books, like the Alien Enemies Act of 1798 with respect to deporting illegal aliens, or perhaps Smoot-Hawley as per the above, was the catalyst needed by Congress to address the fact that there is a lot of stale legislation on the books that no longer serves the nation’s current needs.  Of course, that would take a lot of work, and that is not Congress’s strong suit.

At any rate, for our purposes, the ruling last night had a pretty clear impact on US equity futures as per the below chart from tradingeconomics.com and has helped propel US futures higher by 1% or more across the board.

You won’t be surprised that the response to this ruling throughout Asia was mostly quite positive, (Nikkei +1.95, Hang Seng +1.35%, CSI 300 +0.6%, KOSPI +1.9%, India’s Sensex +0.5%) although there were some laggards in the region.  And, of course, we cannot ignore the fact that Nvidia reported better than expected earnings last night at ~4:45pm (the first move higher on the chart above) and explained that the future remained very bright for the company with ever higher growth expected.  Risk is on, baby!

So, the chattering classes are going to spend the day discussing how they ‘knew’ that Trump’s actions were illegal and that this ruling opens the door for ever higher stock prices and valuations.  But I wonder how this is going to impact other markets, bonds for instance.  This morning, we are seeing yields back up with Treasuries (+5bps) leading the way while European sovereigns are all higher by between 2bps and 3bps.  Too, JGB’s edged higher overnight as there is a growing feeling that absent Trump’s tariff onslaught, global economic activity is going to pick up dramatically.  And maybe that is what will happen.  

Certainly, metals prices are rallying across the board (Au +0.3%, Ag +1.1%, Cu +0.6%), an indication that demand for economically sensitive factors is anticipated to rise.  Oil (+0.3%), too, is rallying modestly although is showing no inclination to break from its recent trading range as per the below:

Source: tradingecomomics.com

There is an OPEC+ Group of 8 meeting this weekend at which they are expected to announce another increase in monthly production of 411K barrels/day.  A number of analysts have explained that these increases are in name only, and that members have been overproducing their quotas, so the quotas are now catching up.  Meanwhile, are we closer to a Ukraine/Russia peace treaty with the possibility of Russian oil sanctions being lifted?  It doesn’t seem that way, but things in that world move in mysterious ways.  However, if you look at the chart above, it strikes me that oil has found a relatively stable equilibrium value for now.

Finally, the dollar’s response to the court ruling on tariffs has been remarkably muted.  On the one hand, this ought not be a surprise.  After all, economists and analysts assured us all before the tariff announcements, that other currencies would decline sufficiently to offset the impact of the tariffs and they were completely wrong.  As well, we continue to hear that the dollar is losing its status as the global reserve currency and that international investors are fleeing Treasuries, and with that fleeing the dollar.  That, too, has been completely off base.

It is interesting that the dollar is little changed given the commodity market price moves, but with US equities leading the global markets higher, perhaps US exceptionalism, at least when it comes to stocks, is not dead yet.  Today’s biggest mover in the currency space is ZAR (+0.4%) which may be attributed to the rally in precious metals although the SARB is meeting today with a policy announcement (a rate cut of 25bps is expected) to come later this morning.  But beyond the rand, virtually every currency is +/- 0.1% or less today.  This is despite South Korea cutting rates last night by 25bps and indicating that future cuts are on the way.  Perhaps oil is not the only thing that has found an equilibrium.

On the data front, this morning brings a raft of data starting with the weekly Initial (exp 230K) and Continuing (1890K) Claims, the second look at Q1 GDP (-0.3%), with its version of PCE (3.7%, core 3.5%) and Real Consumer Spending (1.8%).  As well, because of the Memorial Day holiday, EIA inventory data is released a day late with a small build expected.  We have 4 different Fed speakers, but yesterday’s Minutes explained they were going to remain patient which has been the message since the Powell press conference, and actually before that, as the uncertainties from tariffs have given them no reason to act right now.

The one thing of which I am certain is that we have not heard the last of tariffs at this point.  As mentioned above, there are numerous ways to skin that cat, and you can be sure that President Trump’s legal staff is going to use them all.  As to the market impact, right now, euphoria is the vibe with hopes that tariffs will go away and Nvidia will lead the NASDAQ up another 10,000 points in the coming weeks.  It is hard to see the dollar coming under pressure if foreign investors are going to keep funds flowing in this direction, at least until the next surprising outcome with President Trump’s policies.

Good luck

Adf