While we await outcomes, it does seem that Trump will not get everything he wanted for long

Outlook

The court ruling ending most of the Trump tariffs is a Very Big Deal. It took a little under two months for the Constitution to be asserted in court, so justice delayed only a short while (in the grand scheme of things)--justice was not denied.

Then the mud hit the fan in the afternoon when the orders to dismantle the tariffs (or most of them) was stayed by a different court. We should have known it wasn’t going to be that easy. The federal appeals courts in play here does outrank the Court of International Trade.

It’s important to note this is a stay, not an overruling, but the legal experts are not happy about the court declining to state specifically why it chose this decision. If the appeals court affirms the trade court, Trump will take it to the Supremes. The legal experts point out that the trade court did a very thorough job explaining its decision, in readiness for the Supreme Court.

While we await outcomes, it does seem that Trump will not get everything he wanted for long. The global economy will be upset and unsettled, but not wrecked. Still, the biggest uncertainty—erratic whims posing as policy decision-making-while—while not gone, is vastly reduced.

This means Trump’s power is reduced. He will retaliate.  

In addition, the revenue from tariffs built into the budget going to the Senate is now reduced considerably. Heaven only knows how those guys will deal with it. We await a new forecast from the bi-partisan Congressional Budget Office. It’s going to upset quite a few apple carts.

FX traders were the first to acknowledge that while the court case against tariffs is a big deal, it’s not going to stop Trump. They correctly saw the tariff war as not over even before the latest ruling reinstsating tariffs was announced. Trump has other avenues and fully intends to use them. Both Goldman Sachs and Morgan Stanley write that tariffs (and other trade restrictions) might be fewer and slower, but are still very much on the table.

If we assume that much of the tariff damage will be moderated in the next few months, we must deduce that the US economy will escape recession. In fact, the slowdown may be mild and not catastrophic. But inflation will rise by (say) September. Nobody knows how much but we can probably safely assume it will be far higher than 2.3% in April, perhaps to 3-3.5%. This is CPI, which is what the world (and the consumer) watches even if the Fed prefers PCE.

We continue to find it hard to understand why Fed funds bettors persist in seeing a rate cut in Sept. Some of this may be confidence that Trump can bully Powell.

And indeed, yesterday he did. He invited Powell to the White House and told him it was a mistake not to cut rates. This is such a big deal that the Fed issued a press statement about it, saying “Chair Powell did not discuss his expectations for monetary policy except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook."

Since Trump knows almost nothing about economics or institutions, he will not accept this answer. Stretching things., CNN reported Powell stressed the Fed is staying out of politics. We doubt he actually uttered those exact words. It’s not the Fed’s job to change rates to change US competitiveness with China or anyone else. Recall that the Supreme Court volunteered recently that Trump can’t fire Powell except for cause. Trump might try to use “not adapting to foreign policy.” This would violate the Feds’ mandate, which refers only to the US economy, but never mind.  

So, are we getting the two rate cuts the market expects? Alas, probably. One tiny excuse  out there, weirdly enough, is the Q1 GDP, which was only -0.2% instead of the advance estimate of -0.3%. Economist Bernstein says that if you take out tariff front-running and inventories—after all, the D is GDP is “domestic”—the GDP at 2%. But there’s the fly in the ointment—consumer spending is down to a growth rate of 1.2% (from 1.8% in the advance version). “… to put that 1.2% in context, note that from ‘22-’24, the average real spending growth rate was 2.6%.” The US economy is two-thirds the consumer. Tie his hands and you get slower growth. Separately, the continuing unemployment claims show a minor slowdown.

Personal income and spending today is already fully priced in. The April PCE is expected up to 2.2% y/y, a mere 0.1% gain, with core also up 0.1% for 2.5% y/y from 2.6% in March. Anyone who goes to a supermarket or drugstore knows that these numbers are nonsense. A monthly basket that used to cost $400 is now almost double that.

The worrisome thing in all this is not Trump or the tariffs—it’s that the stock market refuses to see anything catastrophic coming or to acknowledge a likely new cycle. Remember the Minsky warnings, somewhat echoed by some of the gloomsters—severe tariff damage to companies leading to bank distress and possibly failure. As Dimon said, credit is now in dreadful shape. Reuters estimates that just so far, tariffs have cost US companies some $34 billion. The latest court ruling specifies that if the tariffs are declared illegal, companies that paid them will be refunded. Yeah, when? 

This is not to say another 2008 is coming. It is to say that acknowledging the probability would be common-sensical.

Forecast

All markets are dazed and confused by the on-again/off-again whiplash of tariff decisions. It’s of little comfort that the courts are moving fairly quickly now—well, quick for them—because delay means more inflation later on even if tariff refunds are promised should Trump lose all the cases. In addition, there are other laws to be navigated to allow many tariffs and constraints in the name of national security. To add insult to injury, the new budget bill calls for weakening courts’ ability to enforce their rulings.

The FX market was correct (and the stock market was wrong) to distrust the seeming end of the tariff war. This is a temporary reprieve, not a win for Trump—and a huge loss for everyone else, including the US consumer and anyone who really, really wants the rule of law to prevail. Sneaky tricks to get around crystal clear legal intent is foul play.

The world doesn’t like it. It’s worried at the moment about Trump taxing—or grabbing—foreign capital held in the US, with German gold at the top of the worry list this week. Then there’s the on-going threat to fire Fed chief Powell.

Quick, find a reason to prefer US assets. We still have size, variety and liquidity in the US favor, plus the famously resilient economy, but Trump is such a big threat to the economy and the rule of law that these recede in importance. Even foreign leaders and central banks admit there are no serious alternatives to the dollar and its assets, but it seems highly likely they have started looking. 

The dollar may be bid this morning, but long-run, it’s toast, again.

Tidbit: The Washington Post reported that the Qatari government in dazed and confused by the unfolding of the plane event. It asked the US to make it 100% clear that “the luxury jetliner's pending transfer was initiated by the Trump administration and that Qatar was not responsible for any future transfers of the plane's ownership.” The Qataris are worried about “legal liabilities stemming from the White House's maneuver to transform what was originally a sale between two countries into a ‘gift.’"

Originally a sale?  We are not surprised.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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