Traders seem to have put tariffs aside as old news and already priced in

Outlook

The latest US data is not helpful. Existing home sales fell along the same trajectory, if slowing. Weekly jobless claims were no surprise and in line with earlier reports. The Philly Fed shows sentiment sliding downhill but not as bad as expected (although with new orders down and prices paid up, not a good combination).

While current data is not good, it’s also not pointing to disaster. So far not much weight is being given to the start of giant tariffs on April 2, a little more than a week away. Traders seems to have put tariffs aside as old news and already priced in, but that doesn’t seem realistic.

All the same, the Fed was correct in saying the hard data does not yet show a really big growth slowdown or a really big rise in inflation. But it was wrong to ignore the turmoil and discontent alarming both consumers and businesses. For the Fed to use the word “transitory” appears to critics like a concession to the White House.  The word “transitory” is the Trump idea that TreasSec Bessent and others are trying to peddle. It’s received as con-man snake oil by serious economists. 

To be fair, we are indeed in a transition--two big shifts going on and we don’t yet know how they will turn out. Shift one is the resurgence in Europe on both the geopolitical front (taking on Russia without the US) and the fiscal front (Germany going for defense spending). This is visible in the form of European stock markets outperforming the US, but we always need to remember that markets move on expectations that don’t always turn out.

In the absence of firm leadership, European unity and strong resolve falls apart all too often. Example: Germany wants to get rid of the debt brake for itself but not, perhaps, for anyone else. A core component of the original Maastrict Treaty in 1992 is fiscal restraint—a 3% of GDP deficit cap and a 60% public debt target.  The intent of some to ditch that runs into a ton of problems. On the geopolitical front, the Brussels meeting had talk of replacing NATO—European defense without the US. The EU is holding another summit next week.

In addition, the €1 trillion new German spending (final approval today) for infrastructure and defense is hardly going to go smoothly. The WSJ cites skeptics:  “But economists and defense experts have warned that for Germany and Europe to reap the full benefits, the wall of money would need to be flanked with ambitious—and not necessarily popular—structural overhauls, including tax, bureaucracy and labor-market reforms.”

The second transition is the US’ loss of reputation and the decline in the US equity market and the dollar’s dominance. As shown earlier this week, the stock market may not be “the economy,” but it’s a darn good barometer of sentiment.  Still, the current slump can be seen as a needed correction of inflated valuations (and excessive concentration in high tech) and while something to swoon over, not something over which to commit suicide. 

It can also be reversed in a nonce if actual data shows the resilience and robustness that is characteristic of the US economy. Most of all, relief can come in the form of the White House halting its slash and burn approach to everything. Instability comes from the White House like smoke from a giant forest fire. It might take only a little taming to restore equanimity.

We see two problems with this idea. First is tigers and stripes. Trump is not going to change his modus operandi. Problem No. 1 is the absence of inner circle firemen to hose him down. Everyone is a sycophant. And yet, as Trump has hinted, maybe the giant tariffs are a ruse and a negotiating ploy, and will not last more than few months. He has opened the door to a retreat, and if we get that, the whole picture gets turned upside down.

This could be behind the Fed’s assertion that the uncertainty arising from tariff fear and the slump in growth is transitory.

Problem No. 2 is the guardrail of the courts. Trump is the most litigious of businessmen and politicians of all time. He loses the vast majority of his cases but mostly gets what he wants and keeps getting away with it. He has yet to go to jail and let’s not forget that was where he was headed had he not won the election.

Trump intends to put the Constitution and the justice system out of business, along with the second arm of government, Congress. It is not clear the courts ran reel him in and put him in the catch-basket creel. 

The legal system is not the economy, just as the stock market is not the economy. But fear and loathing as the last-resort institution crumbles is likely a source of worse instability than equity overvaluation. If courts appear impotent, Trump’s menace to a way of life grows huge. Fear causes people to pull in their horns and become deeply risk averse. Spending (including capital spending) crashes, Savings rise. Activity slumps. Maybe some go for a giant last party, but the tone is one of despair.

There is a third transition about which we know too little, and that’s China’s diversifying away from getting industrial growth from exports to the US. The less-US policy has been in the works for some time, with less Chinese dependence on US imports with every passing year. Some of it is due to shifting output to other Asian countries to disguise origin, and some is an actual rise in exports to other places. But at home, deflation still rules amid long-lasting dismay over property losses and an unwillingness of consumers to perk up.

Forecast

For forecasting purposes, too much depends on the verbal garbage spilling out of the White House.

We think the Big Picture dictates the dollar’s selloff will persist and be long-lasting, so the current move the other way is a plain, old-fashioned correction/consolidation. Those with a short-term outlook are going to go with the move, targeting the confluence of the 20 and 200-day moving averages at 1.0732, and under that, the old 50% retracement line at 1.0699. Those with the long-term outlook will suffer through the dip and keep trying to find a floor at which to buy the euro and others again.

But beware—the shorter-term charts like the 120-minute show momentum already turning the other way. The correction could be taking a break or even ending already, impossibly tricky to tell on a Friday. Today is a good day to clean your desk and stay away.

Tidbit: Trump is wiping out the Dept of Education, as promised, pointing out that the US spends more on education than any other country and gets literacy and numeracy scores far down the list. It’s not clear that the Dept of Education is at fault but at least he’s keeping an actual campaign promise. A few holdovers will be funded for the low income and disabled, etc. in Title One, but that’s probably a lie.

Of more interest to the economy is his promise to support domestic rare earths production and make that rare earths deal with Ukraine. This could be in part an excuse to ramp up coal, which is included. We await an actual plan.

Tidbit: An outfit named Project Syndicate publishes articles by important people and this time it has one about the dollar by Jim O’Neill, the former head of asset management at Goldman who invented the acronym BRIC while at the UK Treasury. 

He sets out the same outlook for the dollar as we do, if more elegantly. Here are some samples:

It seems clear to me is that the Trump administration is focused on US manufacturing and its own definition of competitiveness, neither of which offers much basis for expecting a persistently strengthening dollar. True, the usual counter-argument is that tariffs are needed because the dollar’s strengthening cannot be stopped, given the “exceptional” US economy’s unrivaled merits. America is “exceptional.” It boasts deep, liquid financial markets and cutting-edge technology, and it is preeminent in security matters and superior to its peers in terms of overall growth.

If the dollar’s relative weakness in 2025 is merely a price correction, these fashionable arguments will likely re-appear and carry it upward again. And yet, there are cyclical, structural, and even systemic factors that may make continued dollar weakening more likely.

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