How does the market respond to Trump's tariffs of "small amounts and multiple times"?

When Trump took office as President of the United States, the much-anticipated tariff policy did not land as "smoothly" as imagined, but rather focused more on domestic affairs. Multiple sources indicate that Trump is likely to use tariffs as a negotiating tool and adopt a "small and frequent" approach to pressure trade partners.

For the financial market, Trump's "hesitation" on tariff policy has brought two new macro variables. First, if the implementation of tariffs is delayed, the market's outlook for U.S. inflation may face downside risk; second, if the imposition of tariffs is slow and lighter than expected, the exchange rates of corresponding trade partners may rebound, in other words, the U.S. dollar may weaken.

Due to these changes, both U.S. dollar interest rates and exchange rates have seen some pullback since Trump took office, but because the market still worries about Trump's "unconventional" approach, it does not dare to increase positions on the opposite side, thus having to wait for Trump's next move and the U.S. data in the first two weeks of February to make further judgments.

The logic of the U.S. stock market appears to be relatively smooth; with interest rates declining and the stock-bond seesaw effect, the U.S. stock market has rebounded. Meanwhile, Trump's "mercantilism" and improving profits have also driven the continued performance of U.S. stocks. Generally, we find that when the 10-year U.S. Treasury yield approaches 4.8% or even close to 5%, market concerns about inflation will significantly heat up, affecting the overall market's risk appetite. However, when U.S. Treasury yields decline, market risk appetite tends to rise alongside a weakening dollar.

From these aspects, inflation remains the focal point of market speculation and concern, and curbing inflation seems to be one of Trump's current top goals. On his first day in office, Trump withdrew from the Paris Climate Agreement and declared an intention to increase oil and gas extraction and supply. Considering the importance of gasoline prices to ordinary American residents, the intention to increase oil and gas supply to curb inflation is also quite evident.

Of course, the significance of all this will give way to the non-farm payroll data and CPI report in early February, which means that the market will find it difficult to find direction before the data is released, and can only rely on carry as the most reliable trading logic. Meanwhile, the bond market may need to use exchange rates as a leading indicator; if the U.S. dollar strengthens, interest rates are likely to rise; conversely, the opposite is true.

Main Text

When Trump took office as President of the United States, the much-anticipated tariff policy did not land as "smoothly" as imagined, but rather focused more on domestic affairs. Multiple sources indicate that Trump is likely to use tariffs as a negotiating tool and adopt a "small and frequent" approach to pressure trade partners. This seems to remind us of various extreme pressures from the Trump 1.0 era, and it is believed that various pulls in the future will still be difficult to avoid.

However, for the financial market, Trump's "hesitation" on tariff policy has brought two new macro variables. First, if the implementation of tariffs is delayed, the market's outlook for U.S. inflation may face downside risk; Secondly, the tariff measures have been implemented slowly and are lighter than expected, which may lead to a rebound in the exchange rates of corresponding trading partners, in other words, the US dollar exchange rate may weaken. At the same time, it is necessary to consider that a stronger US dollar exchange rate will form a certain hedge against the effects of tariffs, meaning that the increase in tariffs and the enhanced purchasing power of the dollar will exhibit a certain offsetting effect, and theoretically, there may be a subtle balance point between the two.

Due to such changes, both US dollar interest rates and exchange rates have experienced a certain pullback since Trump took office. However, as the market remains concerned about Trump's "unconventional" approach, it is hesitant to increase positions on the opposite side, thus having to wait for Trump's next steps and the US data in the first two weeks of February to make further judgments. A similar situation seemed to occur in 2017, when US Treasury bond rates began to decline before Trump took office, but rebounded in early February, only to show a significant downward trend in March. The market may not step into the same river twice, but often does, and simple analogies can only indicate that the market itself has similar trading inertia, but ultimately, the fundamentals of the economy must be considered.

In comparison, the logic of the US stock market appears to be more fluid, with falling interest rates and the seesaw effect between stocks and bonds leading to a rebound in US stocks; at the same time, Trump's "mercantilism" and improving profits have also driven the sustained performance of US stocks. Generally, we also find that when the 10-year US Treasury bond yield approaches 4.8% or even close to 5%, market concerns about inflation significantly increase, which will affect the overall market's risk appetite. However, when US Treasury bond yields decline, the market's risk appetite tends to rise alongside a weakening dollar.

From these aspects, inflation remains the focal point of market speculation and concern, and curbing inflation seems to be one of Trump's current top priorities. On his first day in office, Trump withdrew from the Paris Climate Agreement and declared an intention to increase oil and gas extraction and supply. Considering the importance of gasoline prices to ordinary American residents, the intention to increase oil and gas supply to curb inflation is also quite evident. Meanwhile, at the end of January, the US Treasury Department will announce a new bond financing plan, which will be the first real test for the new Treasury Secretary, Steven Mnuchin. Facing high interest costs, how to arrange future refinancing plans will become the first key game between Mnuchin and the market.

Of course, the significance of all this will give way to the non-farm payroll data and CPI report in early February, which means that the market will find it difficult to find direction before the data is released and can only rely on carry as the most reliable trading logic. At the same time, the bond market may need to use exchange rates as a leading indicator, meaning that if the US dollar exchange rate strengthens, interest rates are likely to rise; conversely, the same applies Author of this article: Zhou Hao, Sun Yingchao, Source: Guojun Overseas Macro Research, Original title: "【Guojun International Macro】Trump's Tariffs 'Small Amounts, Multiple Times', How Does the Market Respond?"

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