Wall Street tried on Tuesday to claw back the worst of the session’s tariff-related losses, but the trade war, which manifested surreally in Justin Trudeau accusing Donald Trump of trying to engineer an excuse to annex Canada, is already the stuff of a dark Hollywood comedy. And we’re just one day in.
For someone who’s allergic to bearish stock market press, Trump’s playing with fire. The S&P’s negative for the year and more poignantly from a White House PR perspective, flat since Election Day.
At the lows, US shares had erased the “Trump bump” entirely, as illustrated below. Bond returns, meanwhile, are now squarely positive since the ballot.
That’s the opposite of the “Trump trade” and as Colby Smith (who works at the real Times now) noted earlier this week, in a piece that in places could’ve been lifted from “It’s The Job Losses, Not The Spending Cuts,” the bond rally has everything to do with growth concerns and nothing at all to do with the (exceedingly witless) notion that Elon Musk’s going to get America’s fiscal house in order by laying off the entire government.
As Smith pointed out, the Trump administration pivoted recently to a focus on 10-year yields as opposed to Fed funds, in part to deflect criticism that Trump’s engaged in a dangerous effort to commandeer US monetary policy à la Recep Tayyip Erdogan in Turkey, but also to target something they can actually influence without having to strong-arm nominally independent technocrats.
If the goal’s to get benchmark US yields — off which pretty much everything else in the known universe is priced — lower, Trump can declare mission accomplished. 10s were under 4.20% this week. The problem: The bond rally’s predicated on recession worries, and that’s not what you want if you’re determined your second term in office will be defined by a “golden age” for the US economy.
The burgeoning growth scare engendered by Trump’s tariff threats and sundry escalations has also succeeded in forcing short-end traders to reprice the Fed trajectory.
As the figure shows, market pricing for 2025 cuts now stands at 74bps, which is to say three cuts almost fully priced. At the extremes Tuesday, markets had priced in even odds of a fourth 2025 cut. As of February 12, traders were on the cusp of fading even one cut for this year.
I’ve been pretty abrasive lately about the idea that this is all part of some grand strategy on Trump’s part, and I won’t apologize because I honestly don’t believe it.
That said, and out of respect for how often he’s right, I did want to quote briefly Nomura’s Charlie McElligott, who on Tuesday said that in his view, the Trump administration “needs an engineered recession in order to allow for disinflation that will translate into Fed cuts and a meaningfully weaker dollar.”
“I think they also know that a ‘negative wealth effect’ across stocks is actually helpful to that end, so I personally believe that any sort of ‘Trump put’ in equities remains meaningfully out-of-the-money lower, not at-the-money,” McElligott added, noting that in any case, “almost nothing he could say right now [will] solve this unless he completely back[s] down on policy.”
I am not sure if I agree with McElligot on this one. Would Trump be ok with a recession just to get lower rates and a cheaper USD? I know that is crucial to his broader policy agenda, but he is so egotistical that I doubt he could stomach a recession, even if it’s engineered.
“Engineering” a recession sounds absolutely fraught with peril, even if those in charge were masters of economic policy, and not the utter clown show that we are witnessing now.
H-Man, I agree that any of the events to get rates lower are bad things – like the economy going up in flames. Not sure that I would agree this is an “engineered recession” — looks more akin to a wrecking ball in a glass factory. He hasn’t figured out that his simple populist solutions collide with each other. Tariffs are going to make inflation more sticky than it already is, and sticky inflation does not bode well for rate cuts even if the economy is sinking. Arthur Burns never figured this out, and every time he cut, inflation came back with a vengeance.
Let’s not forget the economic peril that comes from significantly shaking up the social fabric with nearly complete uncertainty via mass layoffs and deportation, increasing inflation, blood letting critical industries, threatening the social safety net, ransacking the bureaucratic state and eradicating science and logic from decision making to name a few. It’s like being surrounded by 10 poisonous snakes where one step wrong could be fatal.
Some of what we are observing is emanating from Trump and some from the 2025 team, none of whom would suffer if we have an engineered recession and increased inflation. I’ve been wondering if high unemployment (the Feds other mandate) would ‘trump’ the fight against inflation. Wouldn’t want to be in Powell’s shoes now. Also, don’t count on his 51% of the voters turning on him at the midterms since he promised they “wouldn’t have to vote again”. Whatever did he mean?
Trump and his junta will take any action to hurt this country to get his way. He really hates America because he feels he is not sufficiently loved by one and all. He will tell any lie, hurt any individual, most of all the poor, whom he considers losers, to get what he thinks is the “smart” outcome.
I agree with Mr. McElligott. I am getting tired of watching Those In-Charge force fit the news cycle to defend actions they would have to take anyway. Take the downturn in Bitcoin for example. Trump tariffs? I doubt it. Economic uncertainty? Not likely. But before you devalue the buck, you had better give it room to run.