Trump says he will be flexible – That’s not the same thing as another pause

Outlook

Here we are in tariff misery again. If any country declines to deal with the Trump machine or fails to make a decent deal, their economies will suffer. Jared Bernstein calls this “tariff hell” because even Mr. Powell can’t use the “one-time shock only” idea to justify the formerly normal rate cutting schedule—not when it’s multiple, on-going shocks.

Consumer spending will likely stay stagnant and inflation may not show much effect until well into the 4^th quarter. Remember, we get CPI next week, and it’s likely to be tame. So the September cut is okay, but what about that second one? Maybe it can squeak through the October meeting but not December.

So then the question becomes whether Trump will do a TACO again or Aug 1 is an authentic deadline. Since nothing about Trump is authentic (he promotes Bibles, never having read one), we suspect this could drag on well into the fall. Hopes are pinned on TreasSec Bessent, who is hardly perfect but seems to be the only guardrail in the house.

A lot depends on whether the stock and bond markets throw a fit. Considering that the last time they threw a fit in April, Trump relented and the recovery was complete within weeks. Maybe they won’t bother this time. One point of view is that the reason Wall Street is not overly upset this time is that it expects TACO, TACO, TACO. Another is that a weak dollar boosts earnings of US companies that get so much revenue from overseas—about 43% of the S&P.

Trump says he will be flexible. That’s not the same thing as another pause. Trump thinks he is on a winning streak, having just gotten the budget passed and placed Marines on the street in Los Angeles. He is so puffed up with self-congratulation that he is resuming arms shipments to Ukraine and planning to hold talks with Iran and Gaza/Israel.

And keep in mind that by year-end, the US will have inflation and the Fed will talk about raising rates. We get the Fed’s survey of inflation expectations today. Last time out in May, the 1-year was 3.2%, compared to the most recent University of Michigan 1-year expectation (June) at 5%. Fed Waller speaks on Thursday.

With yields needing to keep in step and also make up for those departures we can’t quantify very well, we could easily see the 10-year at 5% by March. We have a 10-year auction on Wednesday that might be interesting.

Another trade note: The WSJ has been steadfast in opposition to tariffs and to the way they are being handled—chaotically. Here is an excerpt of consequences. Note that Japan, Taiwan and S. Korea are all determined to get a deal before Aug 1.

Japanese and South Korean autos already pay a 25% tariff. Cars from the two countries make up about one third of auto imports, so that’s a 50% tax increase on about 15% of the U.S. car market, assuming they keep exporting here. On Monday the shares of Honda and Toyota took a beating. Ford and GM fell too.

But Mr. Trump says he’ll “consider an adjustment to this letter” if they take (unspecified) actions to open their markets. What a way to treat two close American allies and fellow democracies in China’s backyard.

The economic damage will be broad as well, given the volume of trade. The U.S. last year imported $148.4 billion in goods from Japan and $131.6 billion from South Korea. Together that was about 8.6% of total U.S. imports.

Looking through the trade data, is it easy to see how Mr. Trump’s tariffs will hurt American businesses and consumers. Imports from Japan last year included $9.9 billion in assorted industrial machines, $7.5 billion in pharmaceutical preparations, and $3.1 billion in medicinal equipment. South Korea sent over $8.5 billion in semiconductors, $7.4 billion in computer accessories, and $3.2 billion in household appliances.

Important tidbit: Yesterday Bloomberg had a story titled “Misfiring Models Leave Wall Street Currency Traders Flying Blind.” The article names multiple FX trading forms complaining that the usual strategies, like interest rate differentials, are no longer working. The dollar “should” be strong because it has higher rates than everybody else, and the euro should be soft because of the multiple rate cuts, but it ain’t happening. See the chart. See also our chart of the yen vs. the 10-year and vs. the dollar index in the Chart Package.

Overall jitters are not helping, either, as they have in the past, presumably because this time—unlike the last Trump presidency—the safe haven is so clearly no longer safe. The “new forces driving currency markets are hard to track due to sparse data,” referring to capital flows in bond and equity markets and options pricing.

“As a result, traders are being cautious, running smaller and simpler trades, and questioning whether the past few months will be a short-lived adjustment or the start of a harder-to-navigate era.”

“Traders at UBS Group AG and Mizuho International Plc, say the models they used to count on getting it right are instead getting it wrong. And the new forces driving currency markets, like the broad shift of money out of the US and foreign investors buying dollar hedges, are hard to track because the data is sparse, making it tough for professionals to adjust their systems. As a result, they’re running smaller and simpler trades.

A UBS trade says he’s being cautious and stricter. “People are more afraid to be short options going into weekends.”

Another says it’s not at all obvious that his book should be short dollars. “It all shows how experts have been blindsided by the dollar’s selloff and are now questioning whether the past few months will go down as a chaotic but short-lived adjustment or the start of a harder-to-navigate era.”

Think our jumpy track record is singular? No. “A BarclayHedge index of 25 currency programs that trade futures and cash forwards has returned just 0.6% this year. If that sticks on an annual basis, it would be the most dismal performance since 2017.”

Here’s the FX guy at Jefferies: “He warns there will eventually be a snap back in the dollar to bring it in line with interest-rate trends. ‘Whatever the driver, it’s pushing things to the extreme because it’s not impacting central bank policy or growth expectations. Something’s off.”

We find it interesting that not a single big institutional FX house names anything technical. Quick, find some reason for the dollar to be gaining except normal position-adjustment and profit-taking.

Forecast

We have a hint that the dollar correction could fall victim to a Tuesday pullback. It’s not much—most currencies closing over their opens, although not the Swiss franc. And the Japanese yen is the singular exception, in part because the BoJ is behaving strangely.

So far today, the euro is failing to put in a higher high. If US traders have tariff fatigue, the euro can very well keep going down toward the 20-day at 1.1637. Or we can get the same response we got in April. The FX market doesn’t follow the stock market but another crash would help the euro. Traditionally more important is the bond market, and there we see the 2/10 spread widening. This traditionally favors the dollar and while it hasn’t been working of late, it can’t be thrown away. One obvious consequence: Fed rate cuts lower the short end yields while inflation expectations raise the long-end ones, steepening the yield curve.

The charts indicate more dollar gains. Since we can’t believe in such a thing for all the reasons already well-discussed, we used ATR and Fib retracement lines to concoct a way to stay long the currencies without losing our shirts. Unfortunately, today is not likely to deliver a judgement.

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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