The Court decision doesn’t really alleviate uncertainty

Outlook

The US economic outlook darkened on Friday’s data—higher and sticky inflation, slower growth. These should have sufficed to cause a dip but then came the Supreme Court decision. Most reports blame the dollar dip on that.

We can’t say that the Supreme Court decision knocking down Trump tariff regime was a driver of the dollar retreat on Friday—the move started before the decision was handed down--but it sure was a very big political setback for Thump. His rage at being disrespected may turn to an attempt to hijack another right exclusive to Congress—the right to declare war. Presidents have the power to take various military actions without Congressional approval, but only Congress can declare war. Trump is now walking a tightrope and no one trusts his balance, even if he were not 80.

Another likely cause of the dollar retreat was the surprisingly decent data from the UK and eurozone. This reminded everyone that it’s not only the US that can demonstrate resilience. At the same time, again because the move began before the US opened, there must have been an expectation driving sentiment of lousy US data, especially inflation remaining highish and sticky, as well as the crushing realization that GDP growth was indeed harmed by the government shutdown as well as housing tanking and exports failing to deliver. This many negatives took a toll. 

About tariffs

The Supreme Court ruling removes Trump’s ability to make threats and accept bribes to change tariffs, but he has plenty of other ways to make threats and take bribes. From an economics point of view, the Court decision doesn’t really alleviate uncertainty. From a political point of view, Trump disgraced himself by calling the judges fools, traitors and even in the grip of the far-left or foreign influencers, which is (again) pathetic and ridiculous as well as his usual projecting—he is the one being influenced by foreigners like Putin.

The worst thing about Trump’s speech after the decision was not insulting the judges, but saying “I can do whatever I want… I can destroy a country with embargoes… I just can’t do a tariff.” Talk about missing the point of the Constitution, designed specifically to prevent the president from doing whatever he wants, hence the separation of powers.

Trump has been devoted to tariffs for decades. He is hardly likely to give up now. In addition to embargoes, now he is talking about licenses. His conduct is becoming increasingly unstable. He insists a former Clinton and Obama appointee (Susan Rice) be removed from a board or he will axe a merger deal. He tried to extort from various landmark managements that the name be changed to Trump or funding will be cut. Most of all, he is violating his own contracts on trade with countries which had committed to tariffs of less than 15% by blanketing everyone with 15%. Does this mean they don’t have to keep their commitment to invest billions in industries inside the US? We confess that talk TV is interesting these days.

Reuters’ Dolan says “It’s fair to say financial markets are just as confused about U.S. trade policy as foreign leaders who are now left questioning which tariffs apply to their goods, for how long, and under what authority.” But as we see with Canada talking to Mexico, Canada talking to the EU and China, the EU talking to China, etc., the world can get around the US, for a while. In fact, precisely as long as the menace is in office.

Forecast

We think the dollar will repeat the pullback we saw in April-Sept last year, if not exactly. As noted above, as of April 1, one day before the first big tariff announcement, the euro was at 1.0725. It proceeded to 1.1214 at the high on Sept 23. Conditions are different now and history doesn’t repeat, but keep it in mind. Outrageous displays of authoritarian instinct and childish pettiness are not dollar-favorable.

Note that the dollar/yen is already retreating from resistance around 156.00, a level that worries the intervention narrators.

This is especially so when the US economy is showing some cracks—soft labor market, wages no longer outpacing inflation, rising and sticky inflation, slowing growth. Today’s data (Chicago national outlook, Dallas Fed) will not offer much. Friday is stuffed full of releases, including PPI—see the calendar.

The big takeaway from the Trump debacle is uncertainty and more uncertainty. The stock market in the grip of a mania and not paying attention, but currencies are eagle-eyed. We see words like “fog.” And in a fairly short time, the issue of the Fed will come out of the wings to center stage. As we saw before, the threat to Fed independence and even just Trump demands for rate cuts suffice to shove the dollar down.

Tomorrow we have the state of the union speech in front of the Supreme Court and the entire Congress. It’s a Show, not an advisory. We are going to watch prices as it unfolds.

Bottom line, the dollar “should” be on the backfoot.

Food for thought

The Economist has a dandy story about the deep undervaluation of the Chinese yuan (which is supposed to be pronounced you-en). The IMF reckons it is 15% lower than 4 years ago when adjusted for international inflation. In fact, it’s more iike 19% undervalued when the current account and other factors are brought in. On the foreign investment front, China is not making gains, which means either they are lousy investors, have crummy bookkeeping or are lying. The problem started with the property bust and has not been fixed. The IMF advises China spend less on industrial subsidies and more on pensions, poverty—and oh, yes, shoring up the property markets.