Unless Trump backs down, the economic effect in the US will be big and pervasive

Outlook

We have all been beset by tariff fatigue and it has been impressive that the S&P just hit its 8^th all-time high yesterday. Maybe the stock market knows something the economists do not. That includes Trump chickening out and generally able to be ignored because he is such as jackass.

Then we got a 40-point drop in the Canadian dollar in under an hour last evening. This follows the Japanese yen falling fairly hard and a few other FX tariff responses, but minor moves. The dollar’s recent gains are a mystery.

The Fed and all the rest of us can have no doubt now that unless Trump backs down and PDQ, the economic effect in the US will be big and pervasive. The pass-through to retail prices for the average consumer has been limited so far. It will be far higher this time. Everyone will immediately see a giant rise in the cost of their morning coffee. As for the supply line effects and manufacturing inputs (metals, now including copper), a big chunk of output will drop dead.

In fact, we should see bankruptcies, although we saw only a few when Covid struck and the consequences for banks was limited. The one big bank failure had to do with balance sheet investment, not failing customers.

This time we agree the Fed is behind the curve. Yesterday Waller repeated his stance that "We're just too tight and we could consider cutting the policy rate in July." San Francisco Fed Daily likes two cuts this year. That is still the majority view in the CME FedWatch. And Trump is using his budget director as the front-man to investigate whether Powell lied to Congress about the cost of renovating the Fed building, a potential excuse for firing him.

It doesn’t get uglier than this—mass firings of federal workers, now approved by the Supreme Court; arresting and imprisoning brown immigrants whether legal or not; hiding behind NATO to send arms to Ukraine, and a dozen other nasty acts that are more power-seeking and power-affirming than justified by economics and the law.

How can the dollar be the beneficiary of any of this?

Forecast

We keep seeing a few indicators (MACD) that imply the dollar pushback is ending, but they can be unreliable and so it is today. Note that the 10-year yield chart just got a buy signal, which may have something to do with it.

 Also relevant is unhappy data out of the UK, the peculiar stance of the BoJ deferring rate hikes because of tariff uncertainty, and a few other factors (like Mexico’s central bank getting less dovish, according to one report).

But the increase in the general Trump tariff on everybody from 10% to 15-20% with specific names getting much higher numbers (Japan and S. Korea, 25%; Canada, 35% and Brazil, 50%). This returns tariffs to the top of the list of concerns.

Anyone who thinks next week’s CPI reading will be tame and that’s good enough is deluding himself. It’s obvious that by Q4, inflation and supply line disruptions will be severe.  Funny enough, the unlikely July rate cut could set off another dollar collapse. The September rate cut surely will. Now to get through the rest of this ugly summer.

Tidbit: The Washington Post has a front page story on statistics. You read that right. The theme is that Trump does not like the data collected by various agencies, so is just eliminating the data. Maybe that’s better than jiggering it. An example is deleting data in the export effect of the anti-American backlash in Canada. This affects everything from health data to trade.

“Traders might freak out if they suspect the data is unreliable, and Trump’s economic advisers know this.

“But if those concerns had deterred administration officials from fudging the numbers before, their hesitation now appears to be waning. Market analysts and economists are now openly worrying about the integrity of other once rock-solid federal economic data.

Tidbit: Now that well over 100 persons have died in the Texas floodplain flood and firings at federal agencies are taking some blame, the Trump mob is scrapping plans to kill the Federal Emergency Management Agency (FEMA). This is a TACO.

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