Tariffs, T-Bills and Tech Exemptions
Let's look at why the Treasury is auctioning off a record $100 billion worth of four-week T-Bills; also let's check the levy exceptions for Apple, TSM and others.
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"IT’S MIDNIGHT!!! BILLIONS OF DOLLARS IN TARIFFS ARE NOW FLOWING INTO THE UNITED STATES OF AMERICA!"
- President Donald J. Trump (posted to Truth Social)
Happy Global Tariff Thursday!
For those who celebrate. The president's sweeping new reciprocal tariffs on goods imported to the United States from nations that failed to reach any kind of agreement on trade with the current administration have been implemented. As of midnight, after some last-ditch efforts made by a number of counties to squeeze through a closing door, those nations left on the outside looking in have had "deals" assigned to them.
What is the new average U.S. tariff rate? That's actually somewhat debatable. According to Bloomberg Economics, it's now 15.2%, up from slightly more than 2.3% at this time last year, but down sharply from 27.5% as recently as this past April. According to the Yale Budget Lab (which I read about at the Barron's website), the average U.S. tariff rate stands above 18%. Year to date, according to the Penn Wharton Budget Model, the U.S. Treasury has collected about $127 billion in tariff revenue, up 132% from this time last year. This really stops one to think when one realizes that the administration did not even start broadly raising tariffs in reciprocal (as opposed to punitive) fashion until early April.
While tariffs are in fact, aiding the badly imbalanced fiscal condition in the U.S., will there be a further acceleration in consumer-level inflation? Will there be enough of an economic slowdown to tip the U.S. into recession? There is enough debate on these issues. Most U.S. multinational corporations do appear to have been able to manage this hit to margin well so far. That much is true, but many economists do not expect the real impact of these increased tariffs to be felt by U.S. importers and U.S. consumers until sometime this autumn. Is something close to stagflation a threat?
The U.S. and global economies have traversed the second quarter rather well. Third quarter performance is a bit murkier as inflation has at least begun to re-accelerate, but probably not even close to the rate at which economic activity is severely impacted. Will that reacceleration continue? The Cleveland Fed sees a slight pickup in headline inflation for August over July, but no change in the annual pace of core inflation. Both the Cleveland Fed and Hedgeye models see headline inflation cooling slightly for July from the pace experienced in June.
The real story, I believe, will be the impacts of not just tariffs, but tax cuts, deregulation and the weaker U.S. dollar upon the economy, all while recent legislation around Stablecoins provides a backdrop for increased demand for owning short-term Treasury debt securities. There is a legitimate possibility that the U.S. economy begins to realize close to explosive economic growth late 2025 into early 2026, especially at the point that AI productivity gains become visible, but before those same gains can broadly damage demand for labor. Equity markets and now Treasury markets are pricing in this potentially short (or hopefully not so short) period of increased economic activity now.
No Ordinary Thursday
Not just is Thursday, Aug. 7, the day that the Trump administration implements its new reciprocal tariffs on a broad scale. Later today, the U.S. Treasury will auction off a record $100 billion worth of four-week T-Bills. Why would the federal government be going so heavy in borrowing at the short end of the yield curve? There are a couple of reasons that may have factored into this decision. For one, as recently as July and before that May, the U.S. 30-Year Bond paid more than 5%. Ten-Year U.S. paper started the year at a yield that approached 4.8% and did yield more than 4.6% as recently as May.
Put bluntly, that may have rattled the U.S. Treasury Department a bit when it comes to borrowing costs. Fiscal imbalances, a weaker dollar, and inflation can all compel the forces behind free market pricing to take the long end of the curve higher. This going heavy on the short-end could be a matter of scheduling based on those surges in yields.
Thinking a little behind the first-level though, yields at the short-end of the curve are more the product of policy than of free market pricing. Policy can be influenced and to be honest, current spreads imply that the overnight rate is now at least 100-basis points too high. That's not political. That's economics.
So, this could be the start of an intentional habit at the U.S. Treasury to borrow much heavier at the short-end than the long end, in anticipation of a friendlier central bank, in anticipation of Stablecoin-created short-end demand and possibly in anticipation of angry trade partners walking away from the longer end of the curve. Or maybe those trade partners are not just angry. Maybe they see exactly what we see. A more normal looking slope applied to the Treasury yield curve by this coming Spring. At the latest.
On That (Ten-Year) Note...
The U.S. Treasury Department went to auction on Wednesday with $42 billion worth of new Ten-Year Notes. The results were not pretty. The auction went off at a high yield of 4.255%. But this tailed the "when issued" by 1.1 basis points at the time. This was the first tail for the series since February. That was six consecutive "stop-throughs." Bid to cover landed at just 2.351. That's down from a six-month average of 2.58.
Once we get into the internals of this auction, it gets even uglier. Indirect bidders (foreign accounts) took down just 64.2% of this issuance, which was the smallest slice of the pie for this group for this series since January. Direct bidders (domestic accounts) took down 19.6% of the auction. That was the lowest portion of a Ten-Year auction for the home team since April. Dealers were stuck with a whopping 16.2% of the auction. That was the largest slice of the Ten-Year pie that Dealers had been forced to eat since August of last year. Yikes.
More on Tariffs
On Wednesday, the president announced the imposition of 10% tariffs on all imported semiconductor computer chips. There is, however, a big "but." That big "but" is that tech companies are exempt that have committed to manufacture chips in the U.S. The key fab companies such as Taiwan Semiconductor TSM and GlobalFoundries GFS have committed to base domestic chip fabrication in the U.S. in Arizona and upstate New York as well as other states.
These are the kinds of companies contracted by high-end designers such as Nvidia NVDA and Advanced Micro Devices AMD. That's why there's been no intense "freak-out" period ahead of this expected announcement. Of course, I mean other than the usual algorithmic attempt to create false momentum, price overshoot and inefficiency at the point of sale.
Perhaps more importantly, Apple AAPL CEO Tim Cook showed up at the White House on Wednesday to win tariff exemptions for his company. While Apple did not commit to manufacturing iPhones in the U.S., it was up against tariffs on Chinese and Indian made goods. Apple committed to adding $100 billion to an already $500 billion commitment to invest in its U.S. operations made in February.
Apple did commit to hiring 20,000 U.S. workers for jobs in research and development, silicon engineering, software development, and generative AI. The company also committed to manufacturing cover glass for all iPhones and Apple Watches sold around the world at a facility in the state of Kentucky. Apple rallied 5.1% on the news.
Marketplace
Wednesday was a good day for stocks. At the headline. Beneath the surface? Not so much. While growth was back in vogue as the Nasdaq Composite tacked on 1.21%, the S&P 500 gained 0.73%. From there, it gets sloppy. All of the small- to mid-cap indexes closed out the day in the red, as did the KBW Banks.
Six of the 11 S&P sector SPDRs closed out the regular session on Wednesday in the green. The winners were easily led by the Discretionaries XLI as the broadline retailers came out of nowhere and had a nice day. OK, not out of nowhere. Amazon AMZN led the group. Health Care XLV was the day's loser as the bio-techs and big pharma were slapped around.
Losers beat winners across both the NYSE and Nasdaq by slightly better than 50/50 margins. Advancing volume took a 53.8% share of composite Nasdaq-listed trade, but just a 44.4% share of composite NYSE-listed activity. Aggregate trading volume was "meh." Down 2% across NYSE-listings, up 7.5% across NYE-listings and down small across the membership of the S&P 500.
We're not quite out of the woods just yet, but it is starting to look like that two-day potential Day One bearish reversal experiences by equity markets last Thursday and Friday are moving closer to dying in isolation. Last week's highs have not been retaken by the indexes, but for a third-straight day, support for the S&P 500 has been found precisely at its 21-day exponential moving average, while support has been held at the 50-day simple moving average or the equal-weighted version of the S&P 500.
Economics
(All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 220K, Last 218K.
08:30 - Continuing Claims (Weekly): Last 1.946M.
08:30 - Non-Farm Productivity (Q2-adv): Expecting 2.0% q/q, Last -1.5% q/q, SAAR.
08:30 - Unit Labor Costs (Q2-adv): Expecting 1.6% q/q, Last 6.6% q/q, SAAR.
08:30 - Wholesale Inventories (Jun-rev): Flashed 0.2% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +48B cf.
1:00 p.m. - Thirty-Year Bond Auction: $25B.
3:00 - Consumer Credit (Jun): Last $5.1B.
The Fed (All Times Eastern)
10:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
10:20 - Speaker: St. Louis Fed Pres. Alberto Musalem.
Today's Earnings Highlights
(Consensus EPS Expectations)
Before the Open: COP (1.36), CROX (4.03), DDOG (.41), LLY (5.59), MLM (5.22), PTON (-.03), RL (3.48)
After the Close: XYZ (.68), DBX (.63), KTOS (.09)
At the time of publication, Guilfoyle was long KTOS, NVDA, AMD equity.
