Executive orders and empty assumptions: Monday opens on edge as TACO theory gets tested

The Monday open isn’t just a wobble—it’s the first shudder of a market coming to realize that this might not be another round of tariff theatre. With Trump’s 30% tariff warning moving from rumour to Executive Order, futures cracked lower in early Asia trade, as the S&P 500 dipped 0.4%. But beneath the modest surface lies a deeper recalibration. This is the first real test of whether investors still believe in the so-called "TACO trade"—the idea that tariffs are just leverage and that the president will back off before doing severe damage.

For now, the early tells are classic: haven demand picked up, with gold logging a fourth straight gain and the yen catching a bid. Aussie and Kiwi dollars—both proxies for global growth and China exposure—drifted lower. Bitcoin, fresh off a weekend record, eased as well—oil, however, extended gains, helped by geopolitical risk and some short-covering.

Trump’s tariff barrage now spans continents—Canada, Brazil, Algeria, and now the EU and Mexico. Markets have priced it all mainly as noise, but there’s a growing sense that this time may be different. The 30% number is not just headline bait; it's punitive by design, and the street will grow increasingly jittery as the tariff deadline clock ticks down. The recent optimism in Brussels that a deal might materialize has been punctured by a weekend letter that arrived like a diplomatic sucker punch.

And yet, as always with Trumpian trade tactics, there’s ambiguity baked into the execution. There's room for "adjustments," and the White House is likely to dial up or down the tariff pain depending on inflation headlines, polling, or Powell's paint color budget. Markets, for their part, are learning to straddle that ambiguity—hedging their downside risk while staying long momentum.

But this balancing act is getting riskier by the week. U.S. policy credibility hits at a deeper issue: why would any country sign a trade deal with a partner who rewrites terms at will? It’s less like doing business and more like trading volatility with a counterparty who cancels fills post-trade.

Meanwhile, pressure on Powell is rising fast. What started as grumbling about Fed renovations is now veering toward open discussions about removal. If Trump were to oust Powell, it would trigger a profound shock to market assumptions about central bank independence—a 4-5 % % drop in the dollar and a 40–50 bps Treasury selloff would only be the start. The Powell risk isn’t priced; it’s parked.

Add to this the looming Q2 earnings season—expected to be the weakest since mid-2023—and the market suddenly looks less like a coiled spring and more like a tightrope walker balancing on increasingly frayed rope. With earnings momentum waning and valuation stretched, the tape is now highly susceptible to shocks—especially from geopolitics.

The takeaway? What we’re seeing isn’t panic—it’s the opening act of a possible repricing regime. Traders are no longer betting on certainty but on chaos modulation. The 30% tariffs may still be walked back. Powell may keep his chair. But markets are looking over their shoulders as if neither outcome is guaranteed. And in this tape, that shift matters more than the headline print.

The view: The make or break stretch

The market may be basking in the calm of summer, but the geopolitical barometer just twitched hard. With just weeks to go before the 1 August ignition, the White House has slapped a 30% tariff notice on the EU and Mexico—a move that feels less like diplomatic chess and more like a poker player pushing all-in, bluff or not. In a game already thick with tariff feints and headline noise, this one hits different. It’s no longer about posturing—it’s about brinkmanship.

We’re entering a make-or-break stretch for global trade, the kind of tension that cracks portfolios and reshapes macro narratives. These latest tariff letters are less about enforcement and more about escalation—Trump’s trade war playbook has always relied on asymmetry, forcing allies and adversaries alike to negotiate not on principle but on pressure. Think of it as a trader widening their bid-ask spread in thin liquidity, daring you to cross.

The EU, for its part, is playing the clock. Brussels is holding back its own €21 billion counter-strike until 1 August—a calculated delay that suggests they believe a deal is still in play. After all, why punch when there’s still a chance the other guy folds? But time isn’t just a cushion—it’s a compression chamber. The closer we get to August without a resolution, the higher the volatility premium across trade-sensitive assets. And with digital services, pharmaceuticals, and autos potentially in the crosshairs, this isn’t just steel and soybeans anymore. It’s Europe’s core strategic sectors lining up for inspection.

The irony, of course, is that just 24 hours before this tariff salvo, whispers of a potential breakthrough were swirling through markets like the scent of spring before a thunderstorm. Instead, Trump dropped a 30% tariff bomb that blew that optimism back into the weeds. And yet, it fits the now-familiar cadence: optimism, escalation, negotiation, half-deal, repeat.

Markets, though, are no longer flinching at every headline. They’ve grown desensitized—until they aren’t. The problem with crying tariff is that eventually, the wolves show up. Should the full 30% hike go through, it could shave as much as 0.4pp off eurozone GDP—a gut punch for an already anemic economy tiptoeing along the recessionary edge.

Still, there are paths forward. The EU can turn toward concessions—energy purchases, car tariff tweaks, or agricultural access—but each comes with political costs. And should Trump demand capitulation on regulatory standards or tech sovereignty, expect fractures to appear within the European bloc. Unity doesn’t come cheap when national interests diverge.

But let’s be clear: full-scale retaliation remains the tail risk. Europe has weapons too—digital services taxes, pharmaceutical choke points, tech regulations—but unleashing them risks a trade war that no one’s balance sheet can afford. These aren't just tariffs anymore; they’re macro grenades, capable of detonating confidence across sectors and borders.

As for the base case: a face-saving compromise is still on the table. Something in the 10–20% blended tariff zone, dressed up in celebratory headlines and shaky legalese. Enough for Trump to claim victory, enough for Brussels to claim preservation. But even if that handshake comes, don’t expect the volatility to fade. Deals are now mere staging points in a rolling campaign of transactional diplomacy. Nothing is guaranteed. Everything is renegotiable.

So traders, strap in. The road to 1 August isn’t just a countdown—it’s a crucible. And what emerges on the other side may not be a deal, but a new world order in trade—one where alliances are conditional, deals are disposable, and certainty is a luxury long gone.

Leave some room for macro—This week might be a CPI firecracker

The tape has been lulled into a lullaby of complacency—rates volatility snoozing near the lows, the Fed playing possum with its "wait and see" stance, and traders treating September cuts like they’re already inked into the script. But Tuesday’s CPI has the potential to jolt the market awake, slap the forward curve, and shatter the illusion of certainty around the Fed path.

Front-end rate vol has been drifting lower all year, like a boat anchored just off the shore. But beneath the calm surface, currents are swirling. US front-end implieds still carry a premium over their EUR and UK counterparts—not because of mispricing, but because the path ahead is foggy and full of forks.

There’s no shortage of questions keeping traders up at night:

1. Does the Fed start cutting in September—or blink?
2. If we get three cuts by year-end, is that the end of the road or the beginning of something more dovish?
3. What if the next Fed chair swings even softer—does that steepen the curve or collapse it under fiscal pressure?

Markets have priced in tariff tranquillity. But the actual impact is still on a slow boat from Asia—literally. Most of the big-ticket tariffs took effect in April, but early exemptions (for goods already in transit) and frontloading by importers helped delay the blow. Real consumer impact only started hitting the dock around May. That means June and July CPI prints are the first real read on tariff pain—and whether US businesses are eating it or passing it down the food chain to consumers.

Traders estimate that in previous cycles, foreign exporters initially absorbed up to 20% of tariff costs. But after three months, consumers were shouldering nearly half the burden—and that’s before factoring in domestic knock-on effects. If history rhymes, the bulk of the inflationary pressure is only just entering the pipeline.

Markets grew numb to Trump’s tariff headlines because they became too frequent to fear. But it wasn’t just headline fatigue—it was that the bid/offer narrowed around where the "true" US tariff rate would land. That certainty was enough to fuel risk appetite, alongside AI euphoria and a better-than-feared earnings season.

Still, the size of the tariff number matters. Traders expect a 15 percentage point effective increase in the US tariff rate this year once sectoral measures are added. That’s a real macro boulder—not a pebble. If CPI starts registering that weight, it could stall the September cut narrative before it even begins to coast downhill.

Two things could upend the consensus glidepath:

• Sticky or rising inflation that makes the Fed flinch.
• A softening labour market that forces their hand anyway.

In either case, we’re not playing hero ball here—we’re staying light in front-end rate risk until more CPI cards are on the table.

The US consumer has been the star quarterback of the post-COVID cycle—flexing spending muscles, dodging inflation hits, and powering GDP. But even MVPs wear down.

A dovish next Fed chair could steepen the curve and take the Dollar down a peg, especially with fiscal deficits running hot and financial conditions still loose. But absent a real deterioration in labour markets or a housing mini-collapse, it’s tough to bet against the consumer just yet.

That said, housing is flashing early warning signs. Home price appreciation has rolled over in sequential data from FHFA and Zillow. Existing home sales are sluggish, and high rates aren’t helping sentiment, especially in the multifamily space, where softening immigration may cap rental demand.

Structurally, consumers are still okay—but they’re skating on thinner ice than the tape implies. The next cracks may show up in jobless claims or housing prints before they’re obvious in headline retail numbers.

There’s no need to load up on front-end rates just yet—not with tariff pass-through only halfway done, and CPI about to potentially reprice the Fed curve. Structurally, we remain Dollar-bearish, but the descent may be more of a slow grind than a swan dive.

Curve steepeners still make sense—especially in Europe, where fiscal-monetary divergence is playing out more cleanly. But in the US, the next few weeks are about survival, not heroics. The CPI print could be the moment when the market’s "certainty" meets the real economy’s messiness—and that’s when positioning really matters.:

The Fed’s summer silence might seem like tranquillity on the surface, but beneath the calm, the current is swirling. Traders have been lulled by the low hum of front-end rate vol, but make no mistake—there’s tension building in the pipeline. The implied vols may have cooled, yet U.S. front-end pricing still trades rich versus Europe and the UK, and there’s a reason: the road ahead is foggy, and the GPS is blinking “Recalculating.”

Markets are reloading questions like shells into a double-barrel: Can the Fed cut in September—and should it? Even if Powell’s team strings together a hat-trick of cuts before year-end, does the easing cycle end there? Or are we just front-running a changing of the guard, where a more dovish Fed chair with looser reins redefines terminal altogether?

The summer data gauntlet will be brutal. Tariffs—once a source of soundbite fatigue—have taken on renewed life as they creep into inflation math. Thus far, the CPI has managed to sidestep the full punch of Trump’s tariff volley, but don’t be fooled. April’s levies had a lag, and May’s prints were only the first shadows on the cave wall. With early shipments exempt and some import frontloading muddying the waters, the real inflationary footprint won’t reveal itself until late summer.

According to Goldman Sachs GIR, the consumer’s share of the tariff tab started at zero and is marching steadily toward 40%, with their model pointing toward a terminal impact of 70%—even 100% when you include domestic knock-ons. If those numbers stick, then the glidepath to a September rate cut could hit turbulence fast. The market’s recent immunity to tariff headlines was less about complacency and more about clarity—uncertainty narrowed as the tariff range became more predictable, helping risk assets breathe easier.

But that comfort may prove short-lived. GIR’s 14pp increase in effective tariff rate is a slow-acting fuse. Whether it burns quietly into CPI or sparks into a full inflation flare-up remains to be seen. Meanwhile, the Fed’s dual mandate is on watch: one eye on prices, the other on jobs. If the labour market buckles or if real wages roll over, the doves will coo louder.

Positioning into this? Caution is warranted. A front-end stance here feels like stepping into fog without a flashlight. We stay light. There’s more wood to chop before conviction returns.

On the consumer front, it’s not all bad news. With fiscal policy still running wide open, financial conditions loose, and no signs of fiscal tightening, the U.S. consumer remains in decent shape—for now. A dovish Fed chair arriving in 2026 could put steepeners back in vogue and tip the dollar onto a new downtrend. But unless the labor market sours quickly or housing becomes a full-blown drag, it’s hard to short Main Street America just yet.

Still, cracks are appearing. Home prices are slipping quietly, like tectonic plates before a quake. FHFA, CoreLogic, Zillow—they all whisper the same message: sequential declines, softening demand. And while single-family prices may hold, multifamily rents could suffer more, especially as immigration flows ebb in some areas.

In sum, we’re in the messy middle—between data-dependent caution and longer-term structural trades. The Fed path remains murky, but steepeners, particularly in Europe, still resonate. The dollar may weaken further, but not in a straight line. And for front-end U.S. rates? This isn’t the moment to plant a flag. It’s a time for nimbleness, dry powder, and sharp ears.

Summer might be slow, but it’s anything but quiet.