The Fed is once again overlooking the disinflation caused by Trump’s tariffs and policies

The coming weeks are loaded with explosives. The question is whether anyone lights a match. Today we have a Treasury auction of 20-years. Bloomberg writes “Last week, a closely watched sale of 30-year debt saw stronger-than-expected demand, easing worries that investors would shun the US government’s longest maturity.”

Then today we also get Italy CPI, the Empire State index, and Canadian housing starts. Tuesday brings the Bank of Japan decision (a hold expected), ZEW and US retail sales. Then it’s the Fed policy meeting on Tuesday and Wednesday where it might suggest a July (or Sept) rate cut. Wednesday brings UK CPI, eurozone CPI and TICs.

Thursday it’s the Bank of England and Friday, UK retail sales. The Swiss National Bank also meets on Thursday and analysts will be holding their breath for any mention of negative rates again.

Then there is “triple witching” on June 20th when stock options, stock index futures, and stock index options all expire. It can result in high volatility—or not.  Then there is the July 4 holiday that delivers a three-day weekend in all US markets, and right after that, the July 9 end of the pause on the 50% tariff on the EU.

Bloomberg notes that the Israeli-Iran war will likely affect the US bond market. “The yield on 10-year US bonds rose three basis points to 4.43% on Monday, underperforming German peers. Traders pared bets on interest-rate cuts from the Federal Reserve, pricing 46 basis points by the end of the year, compared to 49 basis points on Friday.

“US Treasuries are down since tensions between Israel and Iran turned into a direct conflict on Friday and selling pressure is likely to have a lasting effect if past episodes of clashes are any guide. Iran’s direct strikes in April 2024 and another flare-up between the two nations in October had also pushed up US yields rapidly and kept them elevated over a 30-day period, Bloomberg analysis showed.”

See the chart… this is a flight to safety and a small return of safe haven status. But remember, we didn’t have Trump then. The excellent Chandler puts it more tactfully: “The geopolitical tensions could not offset the weakening of the US brand.”

More and more analysts and reporters are calling the Fed “behind the curve” for the umpteenth time, including the WSJ:

“The Labor Department’s May survey of households found 700,000 fewer people with jobs than in April, a clear sign of strain in small businesses. The prime interest rate is 7.5%, too high for most businesses. Credit-card interest rates are above 20%, a record high. The mortgage rate is prohibitive, driving up housing costs and rents. Monthly mortgage payments are at a record high, and builder confidence is down.”

The Fed is failing to see the disinflationary movement that the tariff regime and other Trump policies are generating—again. This particular author (David Malpass) says Trump is doing all the right thing—and he’s was a Treas UnderSec under Trump the first time around and president of the World Bank, now a professor.  Quick, remove your kid from Purdue.

Not everyone is biassed like this guy and yet we see calls for rate cuts from all directions—and yet, not in the Fed funds futures market.  We guess the idea of a hint of a cut at this week’s FOMC is probably wishful thinking.

The known unknown is whether the Israel-Iran conflict harms the oil market. The Strait of Hormuz carries about 20% of thew world’s oil. It has not bee closed in earlier conflicts, and the US is sending ships as a warning to Iran to mind its P’s and Q’s.

This is probably why the markets have calmed down—confidence that oil will not be affected. Israel is too smart to annoy the world, so if anyone harms those shipments, it would be Iran shooting itself in the foot. Reuters notes that oil is still down some 8% y/y. “The last time crude topped $100 per barrel was after Russia's full-scale invasion of Ukraine in 2022, but it sustained those heights for less than four months. Prior to that, you have to go back over a decade to see crude hit triple digits.”

Forecast: We projected Friday that the pullback would end quickly, and so it has. Markets are not willing to let war in the Middle East upset their apple carts as long as the US stays out of it directly. This is a vote of no-confidence in the US as a safe-haven, although to be fair, the Swiss franc retreated a little so far today, too.

Of the many important developments this week, we choose the SNB rate decision and comments, plus Trump at G7 in Canada. The Swiss franc is the premier safe haven currency and it could be headed for an interest rate of zero or negative. This has to have reverberations.

As for Trump at G7, expect the usual—false claims of trade deals and bluster about how he is the most important person ever in the history of the world. We expect to see photos of other leaders literally turning away from him as we have seen before.

It may be a wonky imagination, but we can’t imagine what would drive the dollar up except the well-nigh impossibility of the Fed saying it’s thinking of raising rates.

Tidbit: We have yet to hear any protest in Congress over the tax provision that would allow Trump to apply a tax of 5-20% on countries that he imagines are taxing US companies unfairly. This should have chilling effect on foreign investors seeking interest, dividends and rent, which may then be taxed again at 3.5% on remittance.

Why are foreign investors not fleeing for the exits and taking some of the $60 trillion of their money with them? Yes, trillion. Whyt they are staying is a mystery. Some ideas: they have a multitude of shadow companies originating in some tax haven and true ownership well disguised. Or, how about this: they can’t find alternative investments in a country and currency they can trust, at last not that this size. Third, they expect Trump to vanish in three-plus years and tax sanity to be restored. After all, it’s that capital inflow that offsets the trade deficit.

Political: About 2,000 “No Kings” demonstrations took place while Trump has having his military parade—in all 50 states and Washington, DC.  The parade itself was pretty cool—all those old uniforms, even cavalry. Trump did not steal the show, for once.

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