Trump Tariffs Will Be Felt by Consumers at the Pump
Following the latest on the Trump administration's Canada and Mexico tariff plans, it's clear that gas prices will rise for U.S. consumers in this region.
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It seems like some of the bigger market moves in the past six months have occurred on Sunday nights. It's always tough to get a good indicator from trading before the U.S. opens for the week, but so far, responses seem appropriate given our take on tariffs.
In its simplest form, here is my current take on tariffs:
- The Fentanyl off-ramp is real. The president is serious about fentanyl and if “progress” is made, the tariffs can be short lived. I do wish we had clarity on progress.
- Canada and Mexico will crack down on fentanyl in their own ways, Canada on the precursors and Mexico with the cartels. I think the China story is more complicated, as there are other plans to launch tariffs against China.
If those two things are real, we can end these tariffs quickly and the impact won’t be large. If it becomes clear that tariffs will be short lived, the cost of tariffs will be assumed in some part by the exporter, the importer and the moves we’ve already seen in the FX market.
The most immediate impact will be felt at the pump on the Atlantic coast. While the U.S. is a net exporter of gasoline, the country exports a lot from the Southern states and imports a lot into New York for use on the Atlantic. It is “fortunate” the tariffs were only 10% on energy, but this will probably leave a mark, almost immediately.
Quick Market Review
Major U.S. stock futures are down between 1.5% and 2%. They were much lower earlier, which seemed a bit of a stretch. At these levels, maybe be a touch defensive, but I would be buying some risk. It also seems to make sense that the Russell 2000 is doing the worst (less ability to deal with tariffs) and the Nasdaq 100 is doing worse than the S&P 500 by a touch (presumably the strong dollar impacts profits on some of the most profitable companies more than others).
On rates, we see the front end of the yield curve with slightly higher yields. This makes sense, as the uncertainty (and commodity inflation risks) keep the Fed on hold. The long end is rallying a bit. Presumably on the risk to future growth? This makes sense, though I’m less convinced about the move at the long end.
On the commodities side of things, energy is a sea of green, with NYMEX gasoline and heating oil leading the way. Fortunately, Canadian energy exports only got tagged with 10% instead of 25%, but I don’t see how this doesn’t hit the entire Atlantic Coast at the pump.
Credit remains boring, as it should. High yield is at greater risk of underperformance here (I always equate high yields to the Russell 2000 and IG to the S&P 500). Credit should remain open to new issues and has little risk of sever spread widening.
Currencies are bearing much of the tariff load. Not just the Canadian dollar, but the euro, too (in anticipation of tariffs?). If we get some sort of relief on tariffs, the currency markets seem most likely to experience violent reversals.
Bitcoin caught me a bit by surprise. More and more positive “chatter” about crypto and even potentially favorable tax treatment, but it led the way lower and caused what can pretty much be described as a “rout” in the altcoin space.
Maybe it was a function of being the only market open, but I don’t like the price action. What I really don’t like is that between the crypto ETFs and some companies, including some included in the indices, have become bitcoin proxies. That allows crypto to more directly impact equities than they have in the past. It is a concern of mine here.
What to Watch
Is this really all about fentanyl?
That is the single biggest question. We probably need some clarity from the president on what his expectations are. We need some clarity then on whether Canada and Mexico will attempt to deliver on them. We also probably need to know whether they need to deliver to end the tariffs, or if they will be “suspended” while they try and make progress.
My positioning is still with this as the base case.
The biggest risks are:
- It was never really about fentanyl, so there is no off ramp.
- The administration, regardless of its initial intentions, decides it likes the revenue from tariffs so much that they backtrack on any off-ramps
- The countries being tariffed respond so negatively that they themselves take the off ramp off the table
We should learn a lot in the coming days. If there is no clarity that there is an achievable way out, markets will be under a lot more pressure, but for now, I’m in the “off-ramp” camp.
If this wasn’t difficult enough to navigate, who knows what unexpected items will pop up this week? The DeepSeek story is far from over!
At the time of publication, Tchir had no positions in any securities mentioned.
