Uncertainty is toxic to business and to the stock market

The data today may not be a game-changer but can re-direct the narrative back toward the labor market, depending on what JOLTs says. We also get small business sentiment, and those are the firms most severely affected by both tariffs and the loss of immigrant labor. Tomorrow it’s CPI and tariffs on steel and aluminum. And oh yeah, the government will shut down on Friday unless Congress can pass the budget, with a vote today.  

We wrote yesterday that markets may well buy the idea there is a Plan even if it’s a bad one, as long as Trump stops the chaotic whipsawing. The Trump agenda seems to call for deliberately invoking a recession (to get the yields and dollar down) and withdrawal from anything “international” or “global.” After some transitory pain, everything will be hunky-dory. And we know that stock markets are the first to recover from a recession, sometimes prematurely. So it’s okay for the stock market indices to tank on the prosect of a mild recession, for the moment.

Well, no. We wrote that before yesterday’s market crash. Wall Street may be over-credulous when it comes to Trump, but this is a bridge too far. We can be pretty sure Trump and his lackeys never expected this response. And Trump is not going to change his rhetoric and whipsawing on tariffs. Tigers and stripes.

Critics of Trump had this story about right for some weeks now. Murdoch outlets like Fox TV and the WSJ are just starting to say all the things we have been saying all along. Yesterday Fox “analysts” said tariffs on China are okay but not Canada and Mexico. Today the WSJ reports JPMorgan Chase economists have raised their recession probability from 30% to 40% on “extreme policies.” Goldman went from 15% to 20%. A private bankers said “We still think this is more of a growth scare than a recession. This is very much a man-made situation.” 

Well, yes. But again: Trump is not giving up tariffs, and he’s not giving up impulsive speaking. Tigers and stripes.

Deliberately seeking recession is a stupid agenda for many reasons, especially the one about the stock market. It took until 1936 for the 1929 crash to recover all the losses. Worse, the 1930 Smoot-Hawley tariffs extended the Great Depression and took decades to reverse. It’s Econ 101—retaliation by other countries (beggar-thy-neighbor) resulted in US-Europe trade contracting by about two-thirds in just the 4 years of its life.

However smart Bessent and Lutnick may be, they don’t have a crystal ball and cannot know how low the stock market can fall. Worse, they cannot know how deep a recession would be or how long it would last. Worse still, they cannot stop Trump from erratic behavior, limelight seeking via shocks, and lying. The market might buy the agenda, but not the chaotic whipsawing. Uncertainty is toxic to business and to the stock market.

If the recession gets too big or the stock market falls too far, how do they think they are going to reverse things?

If the goal is to drive the economy into recession, the outcome is a central bank that takes center stage again (and attention away from the president). If the Fed refuses to cut rates as Trump wants, he will replace it with lackeys who will cut. This is all but a foregone conclusion, Mr. Powell’s defiance notwithstanding. We suspect Mr. Powell knows this. Therefore, rate cuts are coming.

It's even conceivable that the March 19 Fed policy meeting, which has been brushed off for a long time as a non-event, will be an Event, after all. Depending on what they do and say—perhaps front-loading a rate cut?—the stock market would love that and recover madly. Mad is the right word, too, because it would be non-lasting short-termism.

If Trump decides he likes the stock market after all, he will have to change his tune on tariffs, or fire Musk, or get a deal in Gaza and/or Ukraine. By the June FOMC, we could actually be back on track as the Fed thought in Dec—at least two cuts.

Yes, this is a fable, but not a totally unrealistic one.  Doesn’t PCE inflation this week and PCE late in the month have anything to do with it? Since tariff inflation is not happening yet, it would be employment the Fed could focus on. And we know government firings are in the hundreds of thousands. A rate cut on those grounds is not entirely dumb.

As a general rule, the dollar follows the yield, or rather the relative differential. You’d think lower rates and lower Treasury yields should be dollar-negatives, but many in FX play a long game and can see the bottom forming long before anyone else. We don’t claim to see it (!) but we know, or think we know, that the euro will not continue in a straight line to 1.20 or 1.30.

We doubt it would be a one-time Event to change the trajectory. It’s more likely something from left field, like the realization (already dawning) that the UK and Europe can in fact get along without us. We don’t even have to count on political shifts in the US, especially considering the Dems are back to their old bad habits and can’t get their act together. It’s entirely possible they founder until the midterms and lose again. In any case, that’s not until Nov 2026, and we could be on our third or fourth seismic shift by then. In the end, the dollar continues to founder ever lower until it stops.

Forecast

Those unhappy about the fall in Treasury yields and the dollar are hoping that tomorrow’s CPI will remind everyone that the Fed is still on hold and the dollar premium still exists despite turmoil kicked up in the political situation. Talk of recession (or at least stagflation) is still just talk. The only real thing we have might be the Atlanta Fed’s Q! GDPNow at -2,4% and that’s still not actually “real.”  (We get another forecast on Monday). A reprieve is possible. We expect the euro to fall back at least a little now that it has surpassed the 62% retracement level. If it does not, look out below.

Tidbit: The NY Fed consumer survey shows

• Median inflation expectations increased by 0.1 percentage point (ppt) to 3.1 percent at the one-year horizon and were unchanged at 3.0 percent at the three-year- and five-year-ahead horizons.

• Consumers’ year-ahead expectations about their households’ financial situations deteriorated considerably in February. The share of households expecting a worse financial situation one year from now rose to 27.4 percent, its highest level since November 2023.

• Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—jumped up by 5.4 ppt to 39.4 percent in February, its highest reading since September 2023.

• The average perceived probability of missing a minimum debt payment over the next three months increased by 1.3 ppt to 14.6 percent, its highest level since April 2020.

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