Disappointment Likely Ahead as Trump Policies and Trade Deals Drive Market
The markets will continue to be headline driven with three key policy changes and a range of trade deal negotiations in the works.
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Markets will continue to be headline driven. There are three main policy issues to examine and some news we need to be thinking about on the deal front.
There are three policies that matter the most right now:
1. Tariffs
The market is pricing in ongoing reductions and delays in implementation as it is hoping and waiting for deals.
They may come, but it is possible that the theme of “tariffs as a source of revenue” retakes the lead in the constantly-evolving game of what tariffs are meant to do.
DOGE hasn’t delivered the savings expected, and with budget negotiations coming up, we might see a shift in focus from the administration (which had been clearly backtracking on the tariffs and global trade war since April 2). We may start to see the impact on shipping, freight and, most importantly, store shelves, in the coming weeks as well as some hints about who is expected to pay the tab for the tariffs. Those potential effects do not seem fully priced in here (and might be avoided with deals). If anything, the Sunday talk shows seemed to take a step back and become overly fixated on how much trade costs Americans (as though every dollar of trade is bad).
2. Federal Reserve Interest Rate Policy
After Friday’s jobs report (find my instant reaction here) it would be shocking if the Fed cut rates (the market is pricing in 3%).
I think the report was likely flawed, primarily due to the enormous impact of the birth/death model on the report (and the ongoing issue of low survey response rates). Could the Fed be a little more dovish, pushing the June meeting from a 35% chance to something higher?
That would make some sense, as June is probably my base case. But in the end, I expect the Fed to stand still and focus on jobs, selective inflation data (like GDP Core PCE, ISM Prices Paid), and policy uncertainty backing its decision. Expect some angry responses from the administration, which can easily select some inflation measures that show a different story and can insist that the policies are all working to lower inflation.
3. The 2026 Budget
This will become increasingly important in the coming days and weeks, as it will become actual legislation as opposed to executive orders.
On the surface, it is “heavy on austerity.” Unlike in Trump 1.0 (and pretty much in every other administration, which have all claimed to be somewhat cautious on the deficit but then spent on everything), there is austerity here. That should help interest rates if it looks like the budget can progress without the austerity measures being dramatically reduced (always a possibility in D.C.).
It will add some fears about the health of the economy, which has become dependent (even overly dependent) on government spending. While tax cuts are included, only additional or new tax cuts will really be stimulative. The extension of existing cuts put in place during Trump 1.0 won’t be a boost to the economy since virtually no one is adjusting their spending on the assumption that those won’t be extended. If they don’t get them extended, it will be a big hit, but extending them will not be a big stimulus — so they need to get some new measures incorporated.
It's early in the process, but negotiations will start to move markets in the coming weeks.
News on the Deal Front
So far, no official outlines of any deal have been announced.
India still seems to be a front-runner for first deal. We will be looking to see how aggressive the terms of any deal are in order to get a sense of likely future deals as well as their impact. Larger trading partners are the key here and markets will likely ignore deals with smaller or low per-capita-GDP nations.
Potential talks with China helped turn weak futures on Thursday night into strength that only grew after the payroll data hit the tape. A deal with China is key and the market seems optimistic about progress. I am increasingly concerned that the optimism is becoming too great, versus what is likely. I could be wrong, but the headlines coming out of D.C. seem to be going above and beyond the call of duty to make everything seem positive on that front. That might be the case, but it doesn’t ring completely true to me.
A Ukraine deal was finally signed. One thing missing from the U.S. perspective is that the money/profits will be used toward paying for future aid and are not being used to pay for aid already given.
That had been a feature of the deal that did not get incorporated. It seems highly likely that any country negotiating with the U.S. will notice that important shift and negotiate harder than they would have otherwise.
With no troops on the ground and presumably a lag between getting this deal signed and any serious presence in the region trying to extract these resources, there is plenty of “opportunity” for Russia to continue to attack.
Yes, once American companies and workers are there, it will be a deterrent, but that could take some time (especially since I have yet to find a commodity person overly excited about the deal — it could be that I haven’t looked hard enough, or it could be that this is similar to what is in Greenland and the commercial viability is limited). It will be interesting to see how the deal plays out over time, but for now, it is difficult to get too excited about it from either side’s perspectives.
Expect more deal headlines, and hopefully, the outline of an actual deal. I do think that we need to be cautious about “China deal progress” headlines. While I’m not sure what to make of it, the fact that Japan seemed to threaten treasury holding reductions was also interesting (not in a good way).
Bottom Line
Rates and risk assets will continue to be headline driven. Policies and deals will take their turns driving markets.
With everyone trading the same headlines, the moves are abnormally large, and I just don’t see that changing yet.
I am mildly bearish on stocks and bonds at these levels, and will continue to try and anticipate and react to headlines. My sense is that the next few headlines on deals or policies are likely to disappoint.
