Through the tariff looking glass: Inflation, stagflation, and identity crisis

US markets

After a month of whipsaw squeezes, cross-asset wobbles, and pure Q1 chaos, the burning question on every macro trader’s mind is: what’s really lurking behind the reciprocal tariff curtain? With markets bracing for more policy fireworks, it was no surprise to see the Dow, S&P 500, and Nasdaq all close lower, as tariff anxiety remains the dominant headwind, overshadowing everything.

At the heart of the volatility is a growing sense that we’re drifting toward the stagflationary end of the bad-mood spectrum—a toxic mix of rising costs and slowing global growth. While sentiment isn’t outright recessionary (yet), there’s a cloud of uncertainty that continues to fog the runway for any meaningful risk rally. In this kind of environment, macro traders are facing a full-blown identity crisis, as tariffs represent both an inflationary impulse and a drag on growth—a rare double-edged sword that’s hard to hedge cleanly.

Meanwhile, markets have posted back-to-back losses ahead of Friday’s PCE inflation print—a key read on the Fed’s preferred price gauge. A hot number here could deliver another gut punch to hopes of near-term easing, with sticky inflation continuing to haunt the Fed’s dashboard. The consensus is already leaning toward elevated core readings, which—unless there's a meaningful downside surprise—will keep rate-cut dreams at bay and reinforce the Fed’s “higher for longer” stance.

That said, while the auto tariff headlines made plenty of noise, the reaction across stocks and FX has been surprisingly contained. The lack of full-blown panic suggests that, despite the looming tariff storm, markets are not pricing in a U.S. recession—a rare silver lining in an otherwise murky macro backdrop.

But here’s the kicker: in this kind of headline-driven, policy-heavy tape, data doesn’t just have to beat—it has to beat big to move the needle. A soft PCE number could offer some relief, but positive surprises need to punch through the tariff noise floor to have any meaningful effect. Otherwise, we’re just treading water in a fog of uncertainty, with both bulls and bears looking equally exhausted.

We’re heading into month-end, after all—and that alone is as good a reason as any for both bulls and bears to hit the sidelines. No one wants to get caught in the rebalancing crossfire, especially with position squaring, portfolio window-dressing, and CTA flows potentially amplifying moves in dwindling liquidity.

Forex markets

While auto stocks globally are getting hammered in the wake of President Trump’s aggressive tariff swing on imported cars, the FX market is telling a very different story. Despite headlines screaming carnage, the currencies of the most exposed auto-exporting nations are holding their ground, with only minor wobbles. The Mexican peso dipped 1%, the yen and Canadian dollar slipped , but intriguingly, the euro and Korean won both rose by 0.3%. It’s not the reaction most would expect from a tariff shock this size.

Dig a bit deeper and it’s clear: much of the tariff risk was already priced into FX, which isn’t exactly unusual in markets with strong forward guidance and headline conditioning. And on a year-to-date basis, the currencies of the four largest U.S. auto exporters—Mexico, Japan, Canada, and South Korea—are all stronger against the dollar. With the exception of the won, they’re also up since Trump’s inauguration. That's no coincidence—it’s part of a broader USD weakness narrative that’s been quietly brewing, one which I don’t think the White House objects to.

We’d been leaning into the mean-reversion trade for some time( long dollar), and the auto tariff headlines gave a tidy exit for profit-takers. But for many macro traders, the lack of follow-through dollar buying has been puzzling. On the surface, these tariffs should be a massive hit to the macro outlook of these export-heavy economies. But instead of a flight from their currencies, we’re watching an FX market caught in a kind of identity crisis.

Zoom out, and the story starts to crystallize: do you hold the dollar for tariff-driven inflation, or sell it on the back of weaker U.S. growth and rising stagflation risk? My bias leans toward the latter—but timing is everything. As we move past the headline shock value of the tariff announcements, attention will shift to the real-world impact on confidence and the hard data: consumption, capex, PMI surveys, and eventually Q2 GDP.

Gold markets

Gold blasted to fresh all-time highs on Thursday as investors scrambled for safety amid escalating global trade tensions, ignited by President Trump’s latest tariff broadside targeting auto imports. With risk assets wobbling and the spectre of a full-blown trade war back on the radar, gold is doing what it does best—playing its safe-haven role to perfection. The announcement sent tremors through equity markets, but for bullion bulls, it was the perfect tailwind to push prices into uncharted territory.

Meanwhile, in the background, the demand for physical gold is quietly building. Exchange inventories are still in hoard mode, and as we head deeper into Q2, expect the yellow metal to attract fresh flows as a hedge against economic dislocation, sticky inflation, and geopolitical noise.

I doubt gold’s about to lose much altitude here—when it does consolidate, it’s more likely the metal is circling the runway, waiting for its next takeoff clearance.

The view

Markets may have absorbed the initial auto tariff punch, but the real test lies ahead—as the second-order effects begin to ripple through global demand, consumer sentiment, and investment flows. Keep your powder dry—this story's only just getting started.

Mar-a-lago accord

I don’t think the current White House would be losing sleep over a little dollar softness—it can help grease the wheels of trade, lift earnings for multinationals, and even aid in rebalancing. But let’s not get ahead of ourselves: a full-blown “Mar-a-Lago Accord” would be a masterclass in economic self-sabotage.

The root cause of America’s trade imbalances, at least according to Stephen Miran, Trump’s newly appointed Chair of the Council of Economic Advisors, is the overvalued U.S. dollar. In his recent essay, Miran laid out a bold—and some would say brazen—thesis: that the dollar’s strength, fueled by relentless foreign demand for Treasuries and its role as the global reserve currency, has warped the U.S. economy. Cheap imports, uncompetitive exports, the hollowing out of manufacturing, and ballooning deficits—all, in his view, stem from the "dollar problem."

His solution? Enter the so-called Mar-a-Lago Accord—a modern-day redux of the 1985 Plaza Accord, but on steroids. Trading partners would be pressured to actively sell dollars and Treasuries from their FX reserves, or else face tariff retaliation and the potential rollback of U.S. security guarantees. It's economic diplomacy with brass knuckles.

But let’s be real: this is a tough sell. Global trade dynamics have evolved. It’s no longer the 1980s. Today, countries like China and India produce high-quality goods that are highly competitive and meet Western consumer standards. Blaming the strong dollar for every structural flaw in the U.S. economy is a lazy narrative—it glosses over issues like underinvestment in infrastructure, outdated labor policy, and innovation bottlenecks in manufacturing.

And from a market perspective? Even floating this idea could send tremors through global capital flows. Forcing central banks to dump Treasuries could push yields sharply higher, tighten financial conditions, and destabilize bond markets. Risk assets would wobble, and the dollar's role as the world's anchor currency could be seriously undermined—a dangerous game to play for marginal trade gains.

So yes, a touch of dollar weakness might be quietly welcomed in the West Wing, but anything close to a coordinated, top-down dollar devaluation campaign would be crossing into dangerous territory. The U.S. has tools to fix its economic imbalances—breaking the global monetary system isn’t one of them.