Trump is calling for “too-late” Powell to cut rates

We get the US trade balance today. The deficit is forecast to fall after the goods-only report earlier showed the biggest drop in imports ever (after gigantic preemptive stockpiling in March). The April deficit could fall as far as $66 billion from the inflated March at $140.50 billion.

It’s important to note that Trump is dead wrong that it’s only trade that counts. The deficit in goods and services is countervailed by capital inflows, which is why it’s named the balance of payments. Payments come in two flavors. The rude, crude manner of the tariffs and other actions have harm far beyond the effect on the deficit.

Specifically, as the OECD forecast earlier this week, they will drive US growth down to about 1% and inflation higher. Already the releases yesterday firmed up existing rate cut expectations. A cut is not expected on June 18 any longer but Oct and Dec are a dead cert.

Trump is calling for “too-late” Powell to cut rates. The Fed believes it is hog-tied until the tariff war gets clearer and uncertainty falls to a mere roar. Would a giant drop in the stock market do the trick? Maybe not, because the Fed’s mandate is not to influence equities but rather inflation and employment. To be fair, maintaining financial market stability is still in there, but that reference was intended to apply to banking sector viability, not the stock market. We continue to think that a big pullback in equities will set off Trumpian vitriol against the Fed, likely to the point of firing Powell/disbanding the Fed entirely or some other lunatic action.  

Stay tuned.

We continue to worry why traders in all markets deny the crisis that is already here and promising to explode. The gloomsters see the dangers of ruined companies, banks at risk, slower growth and rising inflation, loss of trust in the US by citizens and the rest of the world, the outflow of capital and the rise of the euro challenging the dollar as a reserve currency or at least an acceptable alternative destination.

Meanwhile, the wishful thinkers see the US prevailing because not even Trump can wreck such a huge and vibrant economy. Besides, he has the TACO habit of backing down when the crisis is acknowledged by the equity gang. Meanwhile, the sentiment gap between the institutional and retail investors grows wider. Given the speed price movements are capable of today, the shocks, assuming we get more of them, can set off fireworks from Wall Street to Pennsylvania Avenue.

Neither side is correct. The gloomsters’  adverse developments may well be less than the worst-case scenario, and the wishful thinkers are setting themselves up for a roller-coaster ride that might fly off the rails and fail to come back to the starting point.

The uncertainty is humungous. More than entertainment is Musk continuing to attack the White House and Congress for an “abominable” overspending budget (which will add $2.42 trillion to the deficit), highlighting the absurd pettiness of both men acting like 11-year-old boys with real consequences for real people. Sending home/forbidding the foreign students, wrecking research, attacking universities, and now banning people from 12 countries—all tactics intended to distract attention from pardoning criminals for money and doing heaven knows what with the Trump crypto (a wallet is on its way).

These are political events that we hate to harp on but they do override what little we can glean so far from the macro data. One easy deduction—if Trump can pick out steel and aluminum to tariff to death, nothing is stopping him from picking out other goods for huge tariffs.

Then there is the nearly sure firing of Fed chief Powell. Trump needs “cause.” He will find some. Then we get another wait for the Supreme Court.

Everything about America is repulsive to folks who like honesty and decency. Every news day brings another reason for investors to seek return elsewhere. BoA, according to Bloomberg, advises investors get back into EM’s, despite having gotten bitten before. It likes Brazil and Eastern Europe.

The exit from the dollar and dollar assets might be developing slowly but it’s well-based and starting to be faintly visible. This poses a real problem for the eurozone, which is not institutionally equipped to become a haven. After the ECB cuts rates today, it’s likely it will signal a pause while we await the next chapters in the trade war. Attention will be laser-targeted on what Lagarde says this morning.

And Switzerland matters, too. Reuters’ Dolan dives into its problems: “The supercharged Swiss franc is sucking Switzerland back into a deflationary vortex that its central bank will once again struggle to escape, possibly recycling a fresh wave of financial flows back out across the world.

“The Swiss franc, long perceived as a haven in stressful times, has seen its broad nominal exchange rate index surge 5% since U.S. President Donald Trump's return to the White House. But this is just the latest leg of a relentless appreciation of 20% in five years and 33% over the past decade.”

The SNB may well cut rates to zero as soon as the July 19 meeting and thence to negative. Intervention in the FX market can takes more than one form, including punishing deposit holders.

Somewhat weirdly, the Reuters article notes that shifting the composition of reserves could have huge effects. The SNB remains a top 50 shareholder in all seven of the top U.S. big tech megacap stocks, for example, as well as euro zone government debt.” Eeek. The SNB holdings are about equally divided between euro and dollar holdings. The big worry is a sale of dollar assets into euro assets, but since the SNB cares almost as much about the EUR/CHF as the USD/CHF, one wonders. See the EUR/CHF chart in the Chart Package.

All the same, “While the SNB's trade-weighted franc index is dominated by a 42% euro weighting, the dollar still commands a 14% share and the dollar, yuan, yen and sterling combined account for about a third of the total. And so a sharp weakening of the dollar, dollar-priced commodities and other dollar-linked currencies still packs a punch for Switzerland regardless of relative stability on the euro.”

The SNB is in a real pickle.

Forecast

We await the next move in the Ukraine-Russia war and for once escalation may not favor the dollar, since it’s doubtful the US will intervene. But stay tuned on that one.

After we get the ECB rate decision and Lagarde press conference this morning, the pieces will shift on the board. A surprise is always possible but it’s hard to see what it would be to deliver dollar support. The big overriding trend is ever-deepening loss of confidence and trust in the US and its assets and the main thing holding them up is sheer size. There is no shortage of economic and political analysts saying this, but it’s not a one-time eruption but rather a slow-moving landslide. Remember, no straight lines on FX price charts.

Tidbit: The NYT reports “The Bureau of Labor Statistics is cutting back its collection of data on consumer prices, raising questions about the reliability of federal economic statistics under President Trump.”

The BLS is cutting back collecting data in various places, including Buffalo; Lincoln, Neb.; and Provo, Utah. Without saying so, this is Musk’s work and it will ““increase the volatility” of more some measure.

“But economists said the cuts were the latest blow to a statistical system that was already struggling to maintain the quality of the data. Those issues predate the Trump administration. In a major report last year, the American Statistical Association warned that the reliability of economic data and other government statistics was in jeopardy.

But those concerns have grown since Mr. Trump returned to office.

“In March, Howard Lutnick, the commerce secretary, suggested that he planned to change the way the government calculated gross domestic product. The administration also disbanded several advisory committees that provided input on statistical issues. And numerous government data sets were taken offline early in Mr. Trump’s term, although most have been restored.”

So far no evidence of political interference but “Economists say they still believe the numbers are reliable. But many are worried about a gradual erosion in the quality of government data.” The damage may be minor but damage it is. One economist said “This isn’t the moment when we want our read on inflation to get fuzzier.” Another said “The Fed is used to setting monetary policy in a data fog, but they don’t need it to thicken further.”

Tidbit: A law professor and former appeals court judge had a splendid op-ed in the NYT.

In a nutshell, two federal courts ruled Trump lacks the authority to impose tariffs, but a special appeals court stayed the enforcement to hear additional briefs for a hearing on next Monday. It will likely go to the Supreme Court regardless of the outcome.

“The tariff litigation is shaping up as the biggest separation-of-powers controversy since the steel seizure case in 1952. There, President Harry Truman assumed control over the nation’s steel mills to ensure the continued supply of armaments needed for the Korean War. The Supreme Court rebuffed Truman, establishing the principle that, even in an emergency, the president cannot take upon himself powers that are granted neither by the Constitution nor by congressional statute.

… “It is clear that the president has no inherent constitutional authority to set or change tariffs or any other taxes. That authority is expressly given to Congress in the first clause of Article I, Section 8, of the Constitution. And it is also clear that Congress has not expressly delegated any power to the president to impose tariffs on his own say-so.

Alas, there is some vague language in the Economic Emergency Powers Act of 1977 that might deliver the tariff authority to Trump.  “The answer to this question will reverberate far beyond the issue of tariffs, because the federal statute books abound with vaguely worded laws that, if broadly interpreted, could empower Mr. Trump and future presidents to take upon themselves extensive powers never intentionally delegated by Congress. If the courts uphold the Trump tariffs, it will be a major step toward a presidency that does whatever the president wishes to do.”

In sum, horror show.

Tidbit: We like to make fun of the Fed-watchers who note every change in punctuation and word choice in the minutes and Beige Book, especially what’s missing from previous editions, but we do believe that words count. This exercise might be mostly a waste of time but never mind. Here is a prime example from Reuters on “uncertainty” and “tariffs.” We already know this, but wow. 

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