You Ain't Seen Nothin' Yet!

Trump - Powell Duel Will Add to Market Woes

The previous week’s SriKonomics, “What Mayhem Looks Like”, was just a prelude to the disaster in financial markets last week. President Donald Trump went ahead with the threatened tariff measures on April 2, a day he termed “Liberation Day”. Even more significant than the uniform 10% levy imposed on all trade partners were the “reciprocal” tariffs. In the case of China, the third most important US trade partner after Canada and Mexico, the reciprocal tariffs raised the total levy to 54%. European Union is set to pay a tariff of 20%. China retaliated with a 34% duty and restrictions on exports of rare earth minerals. More retaliations by other countries are likely to be announced over the weekend and next week.

A tit-for-tat tariff war is well and truly on.

Trump said that Chinese authorities had panicked with their response and had “played it wrong”. He had expected the officials to make concessions to regain US favor rather than ratchet up the confrontation. But China is not a democracy and has much greater ability to absorb an adverse political fallout than would be the case in the United States. And historically, trade wars have not ended when the first country imposes trade restrictions, but continue with retaliations and counter-retaliations until significant economic turmoil leads one or more party to cry uncle!

Global investors realized that the trade conflict was not a temporary phase, and markets fell sharply. Major European stock indexes declined by 4 - 5% yesterday alone. Sovereign bond yields rose in Germany, France and the United Kingdom with the Treasury markets in the United States and Japan serving as safe havens. 10-year US Treasurys, which had started the week with a yield of 4.2% ended last night at 4%, after hitting an intra-day low below 3.9% yesterday. Even more dramatic was the decline in 10-year Japan Government Bond (JGB) yield that ended the week at 1.17%, plunging from 1.5% on Monday. And as investors’ flight from currencies accelerated, the price of gold surged to almost $3,200 per ounce during the week. It began the year at $2,641 suggesting a 21% rise to the record level this week.

The fall in equity prices was just as dramatic. The three major US equity indexes were down 5 - 6% yesterday alone, and the S&P 500 index lost 10% of its value during the final two days of the week. The hit to equities stemmed not just from the likely impact of tariffs on corporate earnings. Investors were especially disappointed that they received no signal of a Powell Put at a speech that Federal Reserve Chairman Jerome Powell gave yesterday to business journalists in Arlington, Virginia.

After various members of the Federal Open Market Committee had kept alive expectation of rate cuts this year by suggesting that the impact of tariffs was likely to be one-time and temporary, Powell finally admitted that the size of the tariffs was bigger than expected and the extent of impact on inflation yet undetermined. In short, he and his colleagues on the FOMC were going to wait to act on interest rates until the picture was clearer.

The Chairman’s talk came a few minutes after President Trump admonished him on Truth Social: “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!” Powell, who does not have a sterling record on forecasting inflation, still cannot reduce the Federal Funds rate now when the massive Trump tariffs are likely to boost prices substantially in a wide range of economic sectors.

By the time the FOMC meets on May 6 - 7, we will have early indications that inflation is perking up following the tariffs introduced so far. While it would be a stretch for the Committee to hold rates with rising inflation — higher rates would be the better response — even maintaining rates will likely lead the President to criticize Powell on social media. Expect markets to be roiled by Trump continuing to demand an easier monetary policy to accompany the acceleration in inflation resulting from the tariffs.

If Treasury Secretary Scott Bessent were to revive a suggestion he made to Barron’s last October to create a “Shadow Chair” that would presumably advocate a radically different monetary policy from the actual central bank, investors are likely to become confused as to who actually sets policy.

So watch the Trump - Powell interaction. Further drama ahead!

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

April 5, 2025

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