Trump Douses his Own Fiery Tariff Threats...or Not

Trump began to rapidly cool his tariff threats, a move he indicated was coming on Friday. The sudden reversal is not surprising, given how his beloved stock market has crashed at one of the steepest rates in history:

Wall Street’s “American exceptionalism” trade has been shattered in recent weeks as mounting political uncertainty over Donald Trump’s tariffs, the economic outlook and geopolitics have fueled an unusually prolonged and deep twin sell-off in the US dollar and equities.

The greenback has lost 4 per cent against a basket of six peers so far this year, while the blue-chip S&P 500 has tumbled almost 4 per cent.

Such large and persistent falls in Wall Street stocks and the currency are unusual, with these types of episodes occurring only a handful of times over the past 25 years, according to research by investment bank Goldman Sachs….

“Growing doubts in recent weeks on the sustainability of US exceptionalism sparked one of the fastest US equity market corrections since the early 1970s,” Goldman Sachs told clients this week, adding that “while equity market corrections are historically not that uncommon, a coincident dollar sell-off is — especially when equities rapidly reprice”.

The recent ructions for both US stocks and the dollar come as Trump’s escalating trade war has shaken global financial markets and sparked concerns about the trajectory of the world’s biggest economy. The Federal Reserve on Wednesday slashed its growth forecast and lifted its inflation outlook, citing tariffs for a significant portion of the downgrade.

Seeing the stock market go up in smoke apparently has taken some of the tariff fight out of Trump, something I’ve stated as a caveat in each of my predictions about how damaging his tariffs will be. I added the caveat because he has twice boldly imposed them only to instantly snatch them back like Lucy and her football. The primary game plan of the presidency seems to be controlled chaos.

The extent to which the Don’s threats of tariffs have been the cause of destruction in the stock market could be seen quite notably:

Stocks jumped Monday on optimism that President Donald Trump may hold back from implementing some of his wide-ranging tariff plans and so the U.S. could skirt an economic slowdown from a protracted trade war….

Investors remain jittery over a potential rise in inflation and recession ahead of Trump’s April 2 start date for reciprocal tariffs. But sentiment appears uplifted on reports the duties could be more narrow in scope and that sector-specific tariffs are expected to be delayed, according to Bloomberg News and The Wall Street Journal.

Trump said late Monday afternoon that he may give “a lot of countries” breaks on reciprocal tariffs. He also told the press following a cabinet meeting that levies on sectors such as pharma and autos would still be coming in the “near future,” essentially confirming they would not be part of the early April rollout.

“Market conditions are improving dramatically as the angst around reciprocal tariffs is somewhat diminishing. From a risk standpoint, escalation or retaliation has always been a concern, but should the administration come through with a more targeted and tactical strategy around tariff implementation, risks of a full-blown trade war are reduced,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “We see this as a potential lift to growth in the U.S., should reciprocal tariffs come in a more watered-down form.”

Trump on Friday told reporters that there could potentially be “flexibility” for his reciprocal tariff plan, which had helped push major averages into the green for the session and resulted in the S&P 500 avoiding a fifth straight losing week.

“Targeted and tactical” has not been Trump’s approach with anything this term. He came all-on with tariffs just like he did with government cuts where he slashed entire agencies with very little deliberation about what needed to go (then immediately rehiring hundreds of people wrongly let go).

Trump is making these new concessions, having gotten nothing that he’s asked for from the threatened countries. The only thing he’s gotten from them is their retaliatory tariffs against the US and they, unlike Trump, have kept theirs in place. It looks like Trump is starting to wince first, and we should be glad if that proves to be the case.

Originally, Trump had stated that all the pain from his tariffs would be worth it because the tariffs would help make America great and because foreigners would then be paying our taxes for us, so Trump could seriously cut income taxes for Americans. If he backs away from tariffs as his replacement source of revenue, he’ll have to come up with a new way to pay for his big tax cuts.

But who knows which way this equivocating leader will go?

Stocks are wobbling. Inflation is expected to tick higher again, if maybe only in the short-term, if President Trump follows through on expansive tariffs threats against trading partners around the world. The messaging from Trump and his top economic advisors is that he plans to do just that on April 2, and any short-term market correction or economic “detox” is a price worth paying to reset the U.S. economy.

Apparently, feeling the pain as nations flee US commerce, Trump doesn’t have as much fire in his belly for following through with tariffs. That, or he just felt some serious jawboning for the market was in order after testing tariff relief with a hint this past Friday to see how responsive the market was. It responded nicely, so now we got the full-on talk of relief before the imposition.

Who can know which of Trump’s statements about tariffs he will actually follow through on—the ones that talk about how extreme and broad they will be or the new statements that already seek to cool them down considerably? It is not clear the president knows which way he will go. He appears to be learning as he goes about how these things work and how nations actually do fight back and seek to damage you as much as you are trying to damage them.

Hard to say, but the news of tariff relief before the tariffs have even been put in place brought a huge sigh of relief to the stock market. Of course, you can only fake-slam the whole economy from floor to ceiling to floor again so many times before something breaks and just stays broken…like this:

“It appears that market participants are starting to look elsewhere outside of the dollar or starting to diversify their dollar holdings into other markets and currencies,” said Bob Michele, head of global fixed income at JPMorgan Asset Management. “The broader markets are telling us that it looks like dollar exceptionalism has peaked.”

Who knows which way the dollar will fall as Trump tries to learn how to be president of a big country without breaking it…worse than it was already going to break anyway.