The Trump Trade Shock

Trade Surplus Penalties, Clashing Over Commerce, Agenda Derailment Risk, Recession Watch, Buy When There's Blood in the Streets

We first wrote Cleaning Up the Industrial Policy Mess, six weeks ago. Treasuries and equities have overshot our downside targets for the S&P 500 and 10-year Treasury yields. Although we reached those targets faster than we expected, we urged caution due to sequencing of the administration’s policies and fundamental fallout. There is no change to our view that the detox from the economy’s addiction to government spending is in the early stages, but as we discuss in this week’s note, the equity market has adequately discounted the probability of recession, the Treasury market has fully priced our rate cut forecast, the policy outlook is bottoming out and the index implied volatility market suggests positioning is sufficiently defensive to support a recovery rally.

“Take a look around you Ellen, we’re at the threshold of hell!” Clark W. Griswold

This week’s note provides a comprehensive analysis of the surprisingly large trade surplus penalties, examining their economic implications and historical context. The note then discusses the decent March employment report and resultant delay in the Fed policy rate pivot. As negative as the first sections of the note read, we suspect the policy outlook is bottoming out.