Markets might not have a hold on Trump

Good morning. Tired of uncertainty? Too bad: the Trump administration backtracked again on its tariffs on Canada and Mexico, giving a one-month reprieve to all goods compliant with the US-Mexico-Canada Agreement (USMCA), the successor to Nafta that President Trump negotiated in 2020. All together now: No! One! Knows! Anything! Email us: [email protected] and [email protected]. 

Trump’s sensitivity to markets

One of the standard clichés of Trump administration analysis is that markets, if nothing else, will provide a guardrail. Should he push through economically destructive policies on, say, tariffs or deportation, stocks or bonds would encourage him to back off. This is the “Trump put”.

One might see confirmation of this idea in the events of recent days. Trump has imposed tariffs on Canada and Mexico that, according to orthodox economics, will harm the US economy and will also, according to corporate America, will hurt corporate profits. Stocks, apparently in response, have had a volatile and unpleasant couple of days. And, as predicted, the tariffs have been repeatedly delayed or modified. Protests from the administration — the Treasury secretary saying his focus is on Main Street not Wall Street, the president saying, “I’m not even looking at the market” — sound brittle and defensive in this context.  

The problem with this reading is that, despite much sound and fury, markets simply have not moved much. The S&P 500, the index everyone watches, is down just 7 per cent from its all-time high less than a month ago. Ten year Treasury yields have fallen sharply from their January highs, and that decline is almost certainly down to diminishing growth expectations. But the administration likes lower rates and the attending weaker dollar; the president bragged about the fall in rates in his speech to Congress on Tuesday. Whether he was unaware of the malign cause of the decline, or was simply happy to slide over it, is unknown. So Unhedged would argue that the markets-will-constrain-Trump thesis has not been put to a proper test.

But one can look back at the first Trump term for guidance. Jeremy Schwartz of Nomura has done so, and concludes that

The history of Trump’s first term suggests a relatively high pain tolerance for equity market weakness . . . The simplest and broadest evidence is that Trump chose to escalate the trade war in 2018 (one of the worst non-recessionary years for equity performance in recent decades). Notably, this was also a year with midterm elections . . . On a more micro level, we also see little evidence that Trump timed his tariff announcements to manage equity markets. 

Interestingly, Rafael Ch of Signum Global Advisors has looked at the same history and come to a slightly different conclusion. He found that in most cases where Trump made a particularly strong policy proposal or threat, whether that be steel and aluminium tariffs on Mexico or meeting with Xi Jinping, he backed off most of the time when markets moved against him. But the market move had to be sustained: a move of more than two and a half per cent sustained on a rolling average basis for more than a month. There is little evidence of responsiveness to shorter-term market moves. And, as Ch points out, we simply haven’t had any sustained market falls yet in the second Trump administration, so we don’t know if it will follow the same pattern as the first. 

Ch makes another important observation. The reference point for market declines is important. Down from where? He points out that members of the current administration started out talking about how markets have moved since inauguration day, but have now shifted to talking about market performance since election day. 

In sum: we don’t know if there is a Trump put.

More on the slowdown, and a jobs preview

Over the past two weeks, there has been a vibe shift on the economic outlook. Tariffs and the Department of Government Efficiency are weighing on investor and consumer sentiment. At the same time, have not got a lot of bad hard (that is, non-survey) data. And some of the data that spooked the market is not as bad as it initially appeared.

Though the market was concerned about ISM survey estimates two weeks ago, the official release was not awful. Both manufacturing and services continued to expand, and services saw a pick-up in most sub-indices. While the Michigan sentiment survey was concerning, it’s possible the market read too much into it. At a time when emotion is running high, surveys might prove deceptive. 

The same might be said about recent forecasts. A very bad GDPNow estimate for the first quarter from the Atlanta Fed received a lot of attention:

But the GDPNow model is the problem here. Companies are front-running tariffs by increasing imports, and those imports register as a negative for GDP. But those imports will be offset by a surge in stockpiling, which is positive for GDP that the model does not capture, as our colleague Chris Giles explains.

Instead, most of the hard data we have has been solid or has shown weakness in segments of the market that were already struggling. It seems like the market was concerned about low housing starts two weeks ago. But the housing market was already broken, and this was not much of a change. The initial jobless claims report we got two weeks ago was also solid, and did not show any early damage from Doge’s cuts.  

This all puts today’s jobs report in sharper focus.

The initial indicators we got this week suggest it might be a bad report. The ADP private payrolls report, out on Wednesday, was abysmal. It showed that employers added only 77,000 jobs last month, well below January’s number and just over half of the consensus estimate. The Challenger survey, which tracks job cut announcements, gave a similarly gloomy picture. Planned jobs cuts more than doubled to 172,000, and there was a major increase in announced cuts from the federal government. Weekly Bank of America card data showed consumer spending picking up nationally last week — but it fell in Washington DC, where Doge has workers scared.

We should see some impact of Doge in today’s jobs report. But overall the data is not that bad. The vibe shift could still just be vibes.

One good read

Friendship.