Tariffs Won't Be Paid Back in Base Case on Supreme Court Decision
With a Supreme Court decision on the Trump administration's sweeping tariffs expected soon, it's likely large reversals won't be coming.
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Before we jump into the jobs data, let’s take a quick look at housing and tariffs.
Housing
On Thursday, U.S. President Donald Trump announced that he had instructed people to buy $200 billion of mortgages. As is often the case, this was not accompanied with any detail, but it fits our theme that markets are underestimating what this administration will do for rates.
We have argued the administration has three goals (pay more attention to Scott Bessent than the president):
- Front end rates at or below 3%
- 10-year treasury yields below 4% (i.e., with a 3% “handle”)
- Lower mortgage rates, which come from two factors:
- Getting the 10-year yield lower
- Reducing the spread to treasuries on mortgages (which this “purchase” program is intended to achieve)
Markets still seem to be fighting against the administration's ability to do that. Just like the “buying of mortgages” came out of nowhere and the capture of Venezuelan President Nicolas Maduro came out of nowhere, I expect to see more surprises on the rate side of things that defy conventional thinking.
I haven’t looked at the betting sites, but if there was a chance to bet on “will the U.S. have yield curve control by the end of 2026?” I’d bet “yes,” if it the market was less than 20% or 25%.
Housing starts were down and well below expectations. Building permits were a surprise to the upside. In theory, that is good (and would coincide with the administration trying to get more housing on the market to create “affordability,” but we still need to see permits convert to starts).
The Supreme Court on Tariffs
We might get a decision as soon as Friday.
As much as I struggle to come up with a compelling market impact, I'm not sure that I can.
I think there is an 80% chance or greater that a lot of the tariffs under IEEPA will be judged inappropriate in some way, shape or form (which is kind of in line with the betting markets).
There are so many permutations of what the ruling could look like, that it is difficult to assess market impact. My base case is:
- The ruling will not make it easy to get rebates on tariffs already paid (this will be either a direct result of the ruling, or the administration’s response to the ruling)
- The administration will announce alternative ways to implement similar tariffs. Had the Liberation Day tariffs stayed in place, that would have been difficult to do, since the rates were so high, that they fell outside of the scope of many alternative methods.
- One or more countries that have announced trade deals (then U.K. is high on my list) will say that they are going ahead with the deal regardless of the ruling
So, probably some noise, but if my “base” case is correct, the markets will move on.
The worst case is a harsh ruling that makes it easier to get rebates, as that would hurt treasury bond prices. Maybe that is why we got the mortgage buying announcement?
The Jobs Data
The NFP data was kind of bleak. A 50,000 headline number missed estimates of 70,000 and a whisper number of 60,000. A lot of economists now think this is the “replacement” rate, so that's acceptable, but I cannot help but think that is comes across as weak.
Subtract the two month revision of -76,000, and the headline number was negative.
There were 187,000 workers who couldn’t work due to weather. I think that mitigates the headline number a little.
The birth/death model adjustment was -67,000, which I think also makes me more comfortable with the data than I would otherwise be. This model is fraught with errors (a lot of people agree), so I like that it wasn’t adding to the job market and is roughly the same order of magnitude as the data itself (I hate when it is multiples of the headline).
Manufacturing payrolls dropped this month and last month — production for security cannot come fast enough!
Annual hourly earnings were up (which good for workers), but weekly hours declined (not typically a good sign for future employment).
The JOLTS survey wasn’t particularly rosy either (though the QUIT rate edged higher, which I take as a good sign).
The unemployment rate declined a smidge, to 4.4%, but only because the Household survey showed significant job growth in the month (looks like about 230,000). Though there was no Household estimate in October and this survey has very wide margins of error (even relative to the high margins of error in the Establishment survey, which is used for the headline numbers).
Bottom Line
The jobs data did not do much for the bond market and the probability of the next cut remains skewed towards June (with only a 53% chance of it occurring in April).
I suspect that the administration will ignore the improved unemployment rate... well, let me rephrase that:
- When saying how "well" things are going, it will mention the unemployment rate
- When pushing for rate cuts, it will ignore it
If the argument for cuts is that we are restrictive and have no idea what the neutral rate is, so we should cut because the neutral rate is lower, then this jobs report does nothing to stop that argument.
If the argument is that jobs still look “punk,” then there is plenty of data to support that.
If the argument is that we need lower rates to take full advantage of accelerated depreciation and to jumpstart manufacturing and ProSec, that is still there.
I think the market is underpricing the timing and number of cuts and think it is time to buy not only the front end of the yield curve, but to extend the duration. Twos versus 30s at 135 are underestimating what this administration is going to try and do to the bond market — and I don’t know why people are so comfortable betting it won’t get its way!
I’m not arguing that this is the monetary policy path I would choose, I’m arguing that this is the monetary policy path the administration wants, and it has shown “outside the box” actions in almost every arena, so why not in the bond market?
Have a great weekend, and I think this weekend’s T-report, "Fast and Furious 47," is in the process of writing itself 😊 Unless it is derailed between now and Sunday by some new surprising events!
We will be keeping a close eye on Iran, Syria, Cuba and Columbia this weekend.
If you missed Academy’s Geopolitical Webinar, here is a replay that is worth the watch.
If you are still confused on why we think ProSec is rapidly becoming the replacement of ESG in terms of government policy, investment management and corporate decision making, here and across the globe, "ProSec 2026" is worth a read!
