Tariff saga act three: Legal worries

What began as early trade optimism yesterday – triggered by the US Court of International Trade deeming Trump’s tariffs illegal – turned out to be too good to be true. Things quickly got messy when Trump appealed the decision, prompting the US Court of Appeals to pause the ruling in order to review arguments from both sides. Meanwhile, a separate federal court issued a similar but more limited decision on the tariffs. As a result, the initial ruling that had cancelled the tariffs is now effectively on hold.

As such, uncertainty has surged – no one is quite sure what’s legal and what’s not anymore. Some reports suggest the Trump administration could still find legal grounds to uphold its tariff policies. One of the most cited tools is Section 232 of the Trade Expansion Act of 1962, which allows for industry-specific tariffs on cars, steel, and aluminium on national security grounds. Other potential avenues include Section 301, which deals with unfair trade practices, and Section 122, apparently designed to manage trade deficits and defend the US dollar. In short, there are a lot of legal levers in the air – and most of us aren’t lawyers.

But you don’t need to be a lawyer to smell the thick uncertainty about what the US government might do next – and how trade partners will respond. If tariffs are ultimately found to be unlawful, the willingness of partners to make concessions during trade talks may shrink – not exactly ideal, especially given the critical window for negotiations. And whether there’ll be legal clarity ahead of the June 9th deadline for European trade negotiations – which could end with 50% tariffs, or not – is anyone’s guess.

So it’s under this heavy cloud of uncertainty that the early risk-on rally yesterday fizzled out. The S&P500 rapidly erased its earlier gains, though it still managed to close up around 0.40%. The Nasdaq held on to 0.21%, after earlier surging 2%, thanks in part to Nvidia, which ended the day over 3% higher and just below the $140/share mark.

Beyond better-than-expected earnings and forecasts that confirmed robust AI demand was enough to offset Chinese weakness, Nvidia also got a boost from a US Department of Energy announcement: the company, alongside Dell, has been awarded a contract to build a new flagship supercomputer for the National Energy Research Scientific Computing Center. Dell rose roughly 2% in after-hours trading and looks poised to break out of its one-year descending trend channel.

Elsewhere, the Dow Jones was little changed. Chinese and Japanese stocks gave back some of their recent gains, and both US and European futures are pointing slightly lower this morning. It’s not chaotic – but it’s far from ideal.

In the FX

Ongoing uncertainty around US fiscal and trade policy continues to weigh on the US dollar. Meanwhile, the economic impact of aggressive Trump policies – both on trade and government offices – is starting to show in the data. Figures released yesterday confirmed a contraction in US GDP in Q1, with spending growth more than halving and the trade deficit ballooning as firms rushed to import goods ahead of possible tariffs. Inventories rose. A key price gauge showed a sharp reversal in inflation pressures.

Donald Trump reportedly met with Federal Reserve (Fed) Chair Jerome Powell to press for rate cuts. The US 2-year yield dipped below 4% as markets ramped up dovish bets. But the man is unlikely to give Trump the rate support he wants while trade uncertainty and inflation pressures mount. Most US companies have already said they’ll pass tariff costs onto consumers. Their international counterparts say they’ll do the same. Add in rising shipping costs driven by trade flow disruptions, and the conclusion is clear: prices will rise. Whether that spike is temporary remains to be seen – but either way, it complicates the Fed’s job.

Today’s PCE data – the Fed’s preferred inflation gauge – could surprise to the downside or meet expectations, but the full effects of the ‘tariff tsunami’ likely haven’t reached shore yet. The data will need to be taken with a pinch of salt.

In Europe, the inflation outlook is heading in the opposite direction. The tariffs won’t affect European consumers, and the euro’s recent appreciation is helping lower energy and commodity costs. April inflation numbers across the Eurozone – due today – are expected to show further softening in European price dynamics. Sufficiently weak figures should keep European Central Bank (ECB) doves comfortable with the easing path, which in turn supports the EZ growth narrative and the euro.

OPEC decision in sight

US crude is wavering just above the critical $60/barrel level this week. OPEC is preparing to announce its third major output restoration over the weekend. The cartel is expected to bring an additional 411,000 barrels per day to the market starting in July – about 1% of current production – citing ‘rising demand as official justification. But the official statement feels thin, given waning demand prospects amid global trade tensions. OPEC may simply be trying to appease Trump – or punish member states that failed to comply with past quotas. Whatever the rationale, if trade tensions persist, the rising supply could send oil prices meaningfully lower. A drop of another $10/barrel in the second half of the year can’t be ruled out.