Trump raises tariffs. – The Daily Tearsheet

Vital Statistics:

Donald Trump has imposed 10% tariffs across the board and further tariffs on China and Japan which are labeled bad actors, which has sent stocks down. I do think that 10% was lower than feared. Interestingly, the bond market is rallying – if inflation was the fear, we wouldn’t see the 10 year pushing towards 4%. I am thinking that there is some noise in the bond market between the reduction of QT and the flight to safety trade. Note that the Fed Funds futures haven’t moved much, and are still forecasting 3 rate cuts this year. That said, the futures are inching towards an expectation of 4 rate cuts this year.

There isn’t much action in terms of the slope of the yield curve – the 2s / 10s spread is sort of in a 20-40 bp positive spread for the past few months. Ditto for the F/X markets, where the euro and the Japanese yen are slightly stronger than was when Trump won. The US dollar index (DXY) is down about 2% over the past few days, but nothing dramatic.

Earnings season starts in a couple of weeks, so it will be interesting to see how Corporate America expects to be impacted.

I think there are three potential scenarios here. The first is that our trading partners remove their tariffs on US products, the US removes their reciprocal tariffs and life goes on. This would be the ideal scenario and an absolute win.

The second is that these countries make some sort of token concession that lets Trump declare victory, and then Trump removes the reciprocal tariffs. This is sort of a return to the status quo.

Finally we get into a protracted trade war with our overseas partners, which the US will win, because the US economy is more able to take the pain than overseas partners. This is obviously the worst case scenario.

Trump sees the US as holding the upper hand in these negotiations. He is probably correct in that assessment. Trump is a businessman and has the instinct to use that power to drive a better deal. Trump wants a deal, not a trade war, so I suspect we will see a combination of #1 and #2. Finally, I think Trump isn’t going to stick to a scenario that isn’t working. CEOs generally lose patience with a underperforming strategy quicker than politicians or bureaucrats.

This could mean that globalization will be in retreat for a while. Trump rode a wave of populist rejection of globalization, and it may well turn out that the high water mark for globalism, international climate treaties has been seen.

Where does this leave the Fed? It will make them content to wait until we have clarity on the economic effects of this trade war. Note that Jerome Powell speaks this Friday, so we will see if the Fed has any additional thoughts. If the economy goes south, Trump will pressure Powell to cut rates, but the Fed will need to do that anyway to get closer to r-star.

The private sector added 155,000 jobs in March, which was above expectations of 120,000 and also above the private payroll expectation in Friday’s jobs report. “Despite policy uncertainty and downbeat consumers, the bottom line is this: The March topline number was a good one for the economy and employers of all sizes, if not necessarily all sectors,” said Nela Richardson, chief economist, ADP. Professional and business services saw the highest growth, with financial services right behind it. Annual pay increased 4.6%, continuing its downtrend.

Mortgage applications fell 1.6% last week as purchases rose 2% and refis fell 6%. “Treasury yields continue to be volatile as economic uncertainty dominates markets. Most mortgage rates finished last week lower, with the 30-year fixed essentially unchanged at 6.70 percent. Last week’s level of purchase applications was its highest since the end of January, driven by a 3 percent increase in conventional purchases, while government purchase applications were down 2 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall purchase activity has shown year-over-year growth for more than two months as the inventory of existing homes for sale continues to increase, a positive development for the housing market despite the uncertain near-term outlook. Refinance applications were down almost 6 percent last week and remain very sensitive to rate movements, as most borrowers have mortgages with lower rates.”

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