This week's market analysis highlights a complex interplay of monetary and fiscal policies, primarily driven by anticipated or actual changes. The initial market downturn, triggered by concerns surrounding Jerome Powell's potential dismissal, was reversed when President Trump backtracked, stating he had "no intention" of firing the Fed Chair. This, alongside reassurances from Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, calmed immediate fears about U.S. monetary policy independence, although uncertainties remain for next year when a new Fed chair could be appointed.
Governor Waller's speech introduced a nuanced perspective on the impact of tariffs. While acknowledging the potential for tariffs to raise inflation and lower growth, Waller adopted a dovish stance, stating his willingness to "look through" the price effects of tariffs. He argued that a one-time increase in prices due to tariffs is a transitory event and wouldn't warrant a Fed reaction. However, he emphasized that a significant drop in the labor market, triggered by tariffs leading to layoffs, would prompt him to advocate for rate cuts. Current unemployment data doesn't indicate a deterioration in the labor market, despite anecdotal evidence of layoffs, leading the market to price in only a small chance of a rate cut in May but a more notable potential for one in June.
Regarding trade policy, the market initially reacted negatively to substantial tariffs imposed on China and the rest of the world during "Liberation Day." Trump's subsequent 90-day pause on tariffs for the rest of the world led to a period of trade negotiations. While trade deals typically take months or years to finalize, Trump continues to express optimism. Secretary Bessent hinted at potential reductions in tariffs on China, moving from unsustainably high levels (around 145%) to a more manageable 50%. This prospect boosted market confidence, but the analyst emphasized that even 50% is still significantly higher than pre-tariff levels.
Bessent articulated his vision for an ideal trade deal with China, envisioning a "beautiful rebalancing" where China shifts away from export-led manufacturing growth towards a domestic economy, addressing its trade surplus. Simultaneously, the US would reduce its trade deficit by buying less from abroad and producing more at home. Despite these aspirations, trade negotiations with China appear to be progressing poorly, with conflicting reports from the Trump administration and the Chinese embassy regarding ongoing talks.
The analyst highlighted the emerging real-world impacts of tariffs. Container volume shipments from China are declining significantly due to the high tariffs. This decline is expected to translate into a noticeable reduction in the availability of Chinese goods in US stores in the coming weeks or months, potentially affecting consumer choices. While the 10% tariffs on other countries appear manageable, anecdotes suggest that the cost is shared between suppliers, importers, and consumers.
Bloomberg's chief economist, Anna Wong, suggests that the bulk of the tariffs are being borne on the US side, with importers absorbing the cost by lowering margins rather than passing it on to consumers. This echoes the situation during the initial Trump trade war in 2018-2019, where distributors experienced lower margins. Given the recent surge in corporate margins, companies may have some flexibility to absorb these costs. While prices for travel and airlines are being impacted by discretionary spending, overall, the impact appears to be limited at this point.
The analyst concludes that while there's been a strong rally in the market, driven by anticipation of policy changes and some mean reversion, the fundamental problems remain unsolved. Overall, the long term impacts are still uncertain.