No – That is not how I expect Tottenham to start next season. Bessent had a lofty goal of 3-3-3 - cutting the budget deficit to 3%, pushing GDP growth to 3% and pumping out an extra 3 million barrels of oil a day. Realistically, we are looking at 6-1-0, which basically amounts to no change when compared to the Biden years. But first, the main news comments I have this week (aka the few days since the last issue) are:
· Trump said that he will just set the tariff rates on countries he does not have time to negotiate a trade deal with. This makes a lot of sense. They say it takes years to negotiate a trade deal. It’s just simple to charge tariffs on all incoming products. The time constraint was always going to be a factor, with a limited staff. This paradigm is not as preposterous as it seems, as many retailers charge “slotting fees” to producers for valuable shelf space. So just think of Trump as Walmart negotiating with its suppliers.
· Trump apparently wrote a “friendly” letter to the EU. This corroborates my belief that he wants to make quick deals. While there may be an occasional harsh headline (like when he suggested 80% tariffs on China before the eventual mulligan), I would expect deal frameworks to happen in an orderly fashion. I’m guessing the general formula will be something between the April 2nd 10% baseline and the April 5th max percentages, plus there being some reduction in tariff and nontariff barriers for US products, plus some carveouts for some imports, plus some purchases of US planes, ships, ag, commodities, etc. This would be an awesome result if Trump wasn’t so offensive as to alienate many of the customers.
· PCE inflation looks to be lower again. This is a little contrary to what one would have expected, with companies being able to anticipate tariffs. I don’t understand why all auto prices haven’t risen more. So now I’m wondering if tariffs may not end up having as LARGE an effect as previously expected. Retailers have said they would eventually have to pass on higher costs, but there are some reasons to think that inflation may not be as bad a previously suggested. These reasons include: (1) Trump being less of a trade hardliner (so lower tariffs), (2) not all of tariffs being passed through to the consumer, (3) services prices taking a hit from lower travel by foreigners, (4) softening demand from domestic consumers, and (5) US agriculture products potentially having nowhere to go during trade negotiations (and therefore being dumped in the US). I still expect some price increases from tariffs, but the possibility exists that inflation may be better behaved than previously thought. Lower inflation could change the Fed’s weighting of the balance of risks.
Getting back to Bessent’s 3-3-3 and going in reverse order, it’s hard to see meaningful oil investment when crude is near $60 per barrel. I mean I guess we could use refilling the SPR as a carrot, but it’s not clear if the global Chinese EV dominance isn’t going to leave a mark on global oil demand.
I have a hard time seeing 3% on GDP after we pissed off all of our global customers. Trump is doing his best to get deals signed (see Nvidia, Boeing, etc). But he’s going to have to sell a lot more chips and planes to make up for all the foreigners that are boycotting us. Maybe I could be off by 1 or so on all three numbers, but I don’t think I’m going to be off by that much.
The obvious outlier is the first number. DOGE has been disappointing, and I don’t see any fiscal discipline. This is mostly why Moody’s downgraded US debt to AA+ late Friday. I do think a competent person could shave a “meaningful amount” off of government spending. Elon seems to have given up and the $170B in savings listed on the DOGE website looks really pathetic relative to the federal deficit– especially since many of the cuts are one-time reductions. And Congress clowning around with the enormous budget doesn’t give a bond bull any relief.
This makes for a very uncertain trading environment for a fixed income trader. The reason is that fundamentally, I see reasons to be bullish (potential economic weakness, SLR, Trump/Bessent wants it so), but I have no idea if/when any bond vigilantes will show up. Trading futures is a negative sum game (with transactions costs), and unfortunately, I will be the last to know what the larger bond holders (potential bond vigilantes) are thinking.
I would think that most of any bond vigilante move on the back of the ratings downgrade will happen next week.
Jim Bianco’s arguments for a “more contained” move (than in the past) does make some sense (https://x.com/biancoresearch/status/1923513092475916573), so if this is true, we could have a shorter-term move. We have seen in recent months that the term premium and inflation swaps have been trending higher, so I’m not sure to what extent a Moody’s downgrade was expected. While the market seems to be somewhat convinced that foreigners are buying fixed income, it’s not clear to me if they are buying on visible metrics during negotiations while hedging in other ways. Again, we will be the last to know in a negative sum game.
So what’s a trader to do? For me, whenever I feel uncertain about a larger macro view, I focus on smaller relative value moves, which is the topic of this week’s Value on the Curve.