Trump Liberates Himself From Economic Logic; The US From Growth; And The Fed From Easing

WHERE WE STAND – If you, dear reader, were hoping that ‘Liberation Day’ would bring greater certainty and clarity on the trade front, and prove to be ‘case closed’ on the matter from a market perspective, then you’re likely to have been sorely disappointed.

Nevertheless, we did indeed get that eagerly-anticipated Rose Garden press conference from President Trump, yesterday, whereby reciprocal tariffs that will supposedly ‘make America wealthy again’ were duly announced. Of course, while that might be a catchy political slogan, the upside inflation, and downside growth, risks that said tariffs present make it rather difficult to believe.

Anyway, as for those reciprocal tariffs, which have already taken up plenty of column inches elsewhere, there are three key questions to address:

• Which countries are subject to the tariffs?: Every nation (besides Canada & Mexico, for now)
• What level have the tariffs been set at?: A baseline of 10%, plus an additional reciprocal levy equivalent to half of what the country in question charges the USA (Summary of total rates – China 34%, EU 20%, Japan 24%, India 26%, Vietnam 46%, UK 10%)
• When will the tariffs go into effect?: Baseline on 5th April, Reciprocal tariff on 9th April

In sum, this is well towards, if not beyond, the punchier/most bearish end of expectations, with high levies, and little time to negotiate them away before implementation. Good luck getting any rate cuts amid the macro mess that lot will cause!

Incidentally, those tariff rates appear to have been calculated by taking a nation’s trade deficit with the US, dividing that number by that nation’s goods exports to the US, and then halving it. For the avoidance of doubt, there is no economic grounding or logic to that calculation whatsoever!!

In the run-up to the tariff announcement, markets had traded in predictably choppy fashion, with conviction lacking as participants braced for the impending headline storm. Nevertheless, pre-presser, Wednesday proved a surprisingly positive day in terms of risk sentiment, with stocks rallying nicely, Treasuries softening across the curve, and the dollar rolling over.

In reaction to Trump’s announcement, all of that reversed and more, with a distinct bout of risk aversion gripping proceedings, as participants simply liquidated positions. As such, equity futures dumped into the close, with S&P futures falling well over 200 points from the intraday high, while Treasuries gained ground across the curve, led by the front-end. The dollar, meanwhile, was choppy, but ultimately softer, with the DXY dipping into the 103s, and cable nudging north of 1.30. Yet again, participants view the dollar not as a haven, but as the asset most exposed to the utter incoherence and nonsense emanating from the White House.

Taking a bit of a step back from the intraday moves, though, I still see there being a hell of a lot more ‘noise’ than ‘signal’ on the trade front right now. Frankly, yesterday’s ‘Liberation Day’ seems much more likely to be the beginning of a tit-for-tat trade war across the globe, rather than a clearing event that brings the issue of tariffs to an end from a market and macro perspective.

Now, the ‘fun’ part begins, where countries and trading blocs must decide whether to retaliate with tariffs of their own, or to pacify Trump and seek lower, or even no, tariffs on their exports. In addition, we shouldn’t forget that tariffs on pharma, lumber, chips, and potentially other sectors remain in the pipeline. Furthermore, it remains highly likely that Trump will ratchet up, or down, tariffs, depending on relations with other countries as time goes on, and his mood on any particular day.

Put simply, policy uncertainty is unlikely to recede any time soon, and is likely to continue to cloud the outlook for some time to come – harming both business and consumer sentiment, while also leaving it impossible for market participants to price risk. Against that backdrop, I see little reason to shift away from my defensive bias. Hence, I continue to favour fading upside in equities, while also selling rallies in the greenback, as well as remaining bullish on both Treasuries, and gold.

Were the degree of incoherence in policymaking from the Oval Office to be dramatically reduced, then I’d be happy to pivot away from this tactically bearish stance. For the time being, though, and with yesterday’s events posing more questions than they answered, I find long risk difficult to justify at this juncture.

A final, broader, point that I would make is as follows.

What we’re seeing in terms of tariffs, and a much more protectionist USA, is not the sort of event that markets can discount, and move passed, in a matter of minutes. It is, instead, a much bigger, more strategic, paradigm shift in how not only the US, but the global economy operates. Consequently, it’s a shift that will take months for markets to fully digest, and for the full macroeconomic implications to become clear. Complicating matters, is the question of whether or not Trump actually manages to stick with this strategy for more than a few hours. In summary, it is very difficult to argue against structurally higher volatility as all of this sinks in.

LOOK AHEAD – Unsurprisingly, focus will fall once more on the matter of trade today, as fallout from yesterday’s ‘Liberation Day’ tariff announcements continues.

Elsewhere, though, there are plenty of other bits and bobs for participants to get their teeth into, with the latest services PMI prints making up the bulk of the data docket. This afternoon’s US ISM survey will be of most interest, particularly after the stagflationary – albeit tariff-skewed – picture painted by the manufacturing report earlier in the week. The headline index is seen falling to 52.9, from 53.5 prior, with the employment and prices paid sub-indices to be watched particularly closely.

Away from that, minutes from the March ECB meeting will be a good cure for insomnia, though likely provide little fresh info in terms of the policy outlook, with the weekly US jobless claims figures likely also to be ignored, particularly when neither print coincides with the survey week for the March NFP figure. A whole host of central bank speakers are also due through the day, while Commerce Sec. Lutnick is due to appear on Bloomberg TV this lunchtime.