Markets whipsaw on tariff delay – The Daily Tearsheet

Vital Statistics:

Stocks are lower as markets continue to digest the pause in tariffs. Bonds and MBS are up.

CPI inflation fell 0.1% MOM, which was well below expectations. On a year over year basis, inflation fell 2.4%, which was below the 2.6% forecast. If you strip out food and energy, inflation rose 0.1% versus a 0.3% forecast and rose 2.8% versus a 3.0% Street expectation. In normal times, this would be a cause for stock futures to rally and bonds yields to fall, but these are not normal times.

Stocks rallied yesterday as Trump suspended some of the tariffs for 90 days in order to reach agreements with some of our trading partners who have expressed interest in making a deal. This caused a massive whipsaw in the stock market, sending the S&P 500 up almost 10% and the NASDAQ up 12%. We did not see much of a reaction in the bond market, however.

Ex Bill Clinton advisor James Carville one quipped: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

I think the bond market was the catalyst for this, not the stock market. The 10 year bond yield hit 4.5% in the Tuesday night Asian session, and that began to cause some issues in the plumbing of the bond market. There were rumors of Japanese dumping of US Treasuries overnight, although there was no corresponding movement in the US / JPY spot rate.

The Wall Street Journal had a story about another factor in the bond market rout: leveraged hedge fund bets blowing up. Hedge funds have put on positions in long Treasuries / short swaps in anticipation of a regulatory change in bank capital requirements which would increase demand for long-term Treasuries. Margin calls are forcing these funds to unwind these trades. The basis trade, where a fund buys Treasuries and shorts futures against it is another trade that is being unwound. If everyone is rushing for the exits all at once, it can create dislocations.

I think this is a pause for Trump to get some agreements with our trading partners on the page and then begin to isolate China.

Finally, we did have a good 10 year auction in the afternoon which gave players a sense of relief.

The FOMC minutes were released yesterday, although the tariff news overshadowed the release. Here were some of the highlights:

In their discussion of inflation developments, participants noted that inflation had eased significantly over the past two years but remained somewhat elevated relative to the Committee’s 2 percent longer-run goal. Some participants observed that inflation data over the first two months of this year were higher than they had expected. Among the major subcategories of prices, housing services inflation had continued to moderate, consistent with the past slowing in market rents, but inflation in core non housing services remained high, especially in nonmarket services

With regard to the outlook for inflation, participants judged that inflation was likely to be boosted this year by the effects of higher tariffs, although significant uncertainty surrounded the magnitude and persistence of such effects. Several participants noted that the announced or planned tariff increases were larger and broader than many of their business contacts had expected. Several participants also noted that their contacts were already reporting increases in costs, possibly in anticipation of rising tariffs, or that their contacts had indicated willingness to pass on to consumers higher input costs that would arise from potential tariff increases. A couple of participants highlighted factors that might limit the inflationary effects of tariffs, noting that many households had depleted the excess savings they had accumulated during the pandemic and were less likely to accept additional price increases, or that stricter immigration policies might reduce demand for rental and affordable housing and alleviate upward pressures on housing inflation. A couple of participants noted that the continued balance in the labor market suggested that labor market conditions were unlikely to be a source of inflationary pressure.

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