Trump Making Powell The Fall Guy Again

“I’m not happy with him. I let him know it, and if I want him out, he’ll be out of there real fast, believe me.”

— President Trump, referring to Fed chair Jerome Powell

April’s Philly Fed M-PMI fell 39 points to -26.4, its lowest reading since April 2023. That followed the drop-off in the New York Fed’s M-PMI during the month, suggesting that the national ISM M-PMI will be below 50.0 this month.

The index for new orders in the Philly survey fell from 8.7 to -34.2, the worst reading since April 2020 (chart). Shipments were also down steeply, while employment dropped 20 points to 0.2. That suggests less expansion, but no layoffs.

Ominously, the Philly Fed prices-paid index increased from 48.3 to 51.0, the highest since July 2022 (when CPI was climbing toward 9.0%). Expected goods inflation is likely to keep the Fed on hold with respect to rate cuts, regardless of Trump’s tantrum about Powell.

BTW, Powell has said he would not step down, if asked.

The Home-Building Season Is Starting Off Badly, New Data Shows Economic uncertainty and rising material costs from tariffs darken the outlook for newly built homes

Housing starts, a measure of home construction, dropped 11.4% in March from February, according to new Census Bureau data. That marked the steepest plunge in a year.

Home-building giant D.R. Horton also signaled that the market for new homes is shaping up worse than anticipated. The company on Thursday missed earnings expectations and cut its full-year guidance, citing a slower selling season than it had hoped for. (…)

Now, President Trump’s tariffs threaten to hobble the market for new homes further. Economists say the trade war is increasing the likelihood of recession. Americans tend to postpone big purchases when they are concerned about a slumping economy, fear that their jobs may be at risk or worry about stock-market losses.

Home builders are also vulnerable to higher costs on steel, glass and other imported materials. About 7% of the goods used in residential construction are imported, primarily from Canada, Mexico and China, which face Trump’s tariff threats.

The administration’s deportation of workers without permanent legal status is another blow to an industry that relies to some extent on these laborers. (…)

D.R. Horton, meanwhile, downplayed the impact of tariffs on its business.  The company said it expects its large size will help it absorb any near-term cost shocks from new tariffs.

“We do expect to be able to continue to leverage our relationships and our scale to navigate the cost environment better than smaller builders,” Jessica Hansen, D.R. Horton’s senior vice president of communications and people, said on an earnings call Thursday. (…)

MAGA is not for all…

Trump Says He Is Reluctant to Keep Raising Tariffs on China

President Donald Trump said he was reluctant to continue ratcheting up tariffs on China because it could stall trade between the two countries, and insisted Beijing had repeatedly reached out in a bid to broker a deal. (…)

Trump on Thursday said he was reluctant to keep raising those duties — and suggested he might be open to lowering them.

“At a certain point I don’t want them to go higher because at a certain point you make it where people don’t buy. So I may not want to go higher, or I may not want to even go up to that level,” Trump said. “I may want to go to less because, you know, you want people to buy.” (…)

I thought tariffs sought to stop Americans buying Chinese stuff.

CHINESE CONSUMER WATCH

From Goldman Sachs. Note that these are all in nominal dollars but probably very close to actual volume given near-zero inflation in China.

According to the NBS quarterly household survey, household disposable income grew by 5.5% yoy (5.7% quarter-over-quarter annualized) in Q1, vs. 5.6% yoy (7.0% quarter-over-quarter annualized) in Q4.

Household nominal consumption growth measured in year-over-year terms rose to 5.2% yoy in Q1 from 4.5% yoy in Q4, thanks in part to the ongoing consumer goods trade-in program.

On a sequential basis after our seasonal adjustment, household consumption per capita in nominal terms accelerated to +9.3% quarter-over-quarter annualized in Q1, vs. an increase of 5.9% quarter-over-quarter annualized in Q4. The acceleration in consumption growth was mainly driven by stronger spending on food, clothing, education, culture and entertainment.

The household savings rate decreased in Q1 after seasonal adjustments and fell slightly below pre-Covid trend implied levels, and our estimated cumulative stock of household “excess savings“ edged down to RMB 3.0tn in Q1 from RMB 3.1tn in Q4 accordingly. There are RMB 52 trillion “excess deposits“ in household bank deposits and growth remained largely stable in Q1 vs. Q4.

Thanks to the ongoing consumption boosting measures and improved nproperty sales in top-tier cities, the NBS consumer confidence index ticked up in the first two months of this year (February as the latest data available).

Now Trump Wants a Shipping Tax ‘If this happens, we’re out of business,’ says one shipping CEO.

As if President Trump’s tariff blitz isn’t causing enough heartburn. Now his Administration wants a shipping tax that would raise costs across the economy and make U.S. exports less competitive.

U.S. Trade Representative Jamieson Greer recently proposed to charge fees on Chinese shipping companies and all carriers that use Chinese-built vessels. Fees would range between $500,000 and $1.5 million every time a Chinese-built ship stops at a U.S. port, plus a surcharge for operators with large orders from Chinese shipyards.

Mr. Greer has also proposed export quotas for U.S.-flagged and -built ships that would increase over time. At the start, 1% of U.S. ocean-carried exports would have to be transported on U.S.-flagged vessels of U.S. operators. This would increase to 15% by the seventh year, and 5% of those ships would also have to be built in the U.S. (…)

But China’s dominance has come mainly at the expense of South Korea, Japan and other countries, not the U.S. American-flagged ships cost about 4.4 times more to operate than foreign-flagged vessels. They are also four to five times more expensive to manufacture, which is why even the Netherlands and Finland surpass the U.S. in shipbuilding.

A large culprit is higher union labor costs and inefficiencies caused by trade protection—namely the 1920 Jones Act, which requires that goods are transported between U.S. ports on American-flagged, -operated and -built ships. Shielded from competition at home, U.S. shipbuilders are uncompetitive globally.

No large U.S.-built ship has been sold to an overseas buyer in decades. Mr. Greer’s proposed fees and export quotas won’t change that. All they will do is raise costs for U.S. businesses and consumers already whacked by Mr. Trump’s tariffs, which, by the way, will make U.S. shipbuilders even less competitive. Steel makes up 60% of a ship’s costs.

Mr. Greer is reportedly revising his plan to mitigate the harm to exporters, though the fine print will matter. Meantime, this looks like another example of this Administration’s ill-thought, self-damaging economic nationalism.

• U.S. Moves Ahead With Plan to Charge Fees on Chinese Ships Trade representative plans to charge ships for each voyage, not for each U.S. port call, following industry pushback

The U.S. Trade Representative’s office on Thursday released the plan to charge steep fees on Chinese-owned and operated ships, and lower fees on Chinese-built vessels operated by non-Chinese carriers.

Ships will be charged for each voyage to the U.S. and not for each call at a U.S. port, a step back from an earlier proposal that had drawn sharp criticism from a raft of industries that warned of devastating costs to consumers and businesses. The USTR on Thursday said the fees will only be imposed on any given ship up to five times a year.

Starting in six months, Chinese owners and operators will be charged $50 a net ton on each U.S. voyage. This fee will increase by $30 a net ton each year for the next three years. Non-Chinese operators of Chinese-built ships in six months will be charged based on net tonnage or by container, starting at $18 a net ton or $120 a container. This will increase by $5 a net ton, or the proportional amount for each container, in each of the next three years. (…)

China churns out more vessels than any other country. Its shipyards account for nearly 29% of containerships on the water and 70% of containerships on order, when measured by capacity, according to data firm Linerlytica. The nation also dominates construction of shipping containers and ship-to-shore cranes. (…)

The USTR said fees and restrictions on any given vessel will be suspended for up to three years once carriers can show proof of an order of a U.S.-built vessel. (…)

The USTR said it would charge foreign-built car-carrier vessels based on their capacity, starting at $150 per car equivalent unit beginning in six months, to encourage U.S.-built car carrier vessels.

USTR won’t charge fees on bulk commodity exports on ships that arrive in the U.S. empty, nor on voyages in the Great Lakes, Caribbean and between U.S. territories.

The USTR also said in three years it would impose restrictions on transporting liquefied natural gas via foreign vessels and will increase the restrictions incrementally over the following 22 years to encourage the building of LNG vessels in the U.S.

• US farmers have expressed dismay that an overly punitive fee structure would harm their ability to export goods by forcing ships to visit fewer American ports in an attempt to reduce the fees they have to pay. (FT)

China stops buying liquefied gas from US Standstill shows how Sino-American trade war has spilled into energy sector

(…) “There will be long-term consequences,” said Anne-Sophie Corbeau, a gas specialist at Columbia University’s Center on Global Energy Policy. “I do not think Chinese LNG importers will ever contract any new US LNG.” (…) raising questions over the huge expansion of multibillion-dollar LNG terminals that is under way in the US and Mexico.

Last year, only 6 per cent of China’s LNG came from the US, down from a peak of 11 per cent in 2021.  However, Chinese companies including PetroChina and Sinopec have signed 13 long-term contracts to buy LNG from US terminals, some of which run to 2049, according to data from Kpler. 

Such long-term deals were essential for getting huge LNG projects off the ground in the US, though Corbeau said developers have recently tried to renegotiate terms to take into consideration rising inflation and the costs from US tariffs. (…)

An Even Dumber Idea Than Tariffs If import taxes don’t rebalance the economy, will Trump try a partial default on Treasurys?

This newspaper’s editorial columns a couple of months ago branded President Trump’s tariffs on Canadian and Mexican imports “the dumbest trade war in history.” Alas, my colleagues and I might have spoken too soon. A much, much dumber one is lurking just around the corner: an export tariff on U.S. Treasurys.

Welcome back to Intellectual Trumpism. If you gaze past Mr. Trump’s personal bluster and inconsistency on trade policy, it’s starting to look as if the White House is manifesting the views on the global economy of a circle of unorthodox economists. As Mr. Trump implements—granted, haltingly—these economists’ ideas on tariffs, we should take seriously the risk that the administration will push ahead with some of their other ideas, this time on global financial markets. (…)

The Trumpist idea is that historical factors have pushed America into the role of furnishing the world’s safe assets, particularly the dollar and the Treasury note. Global demand for these assets is enormous—the world economy would judder to a halt without them—and satisfying that demand forces the U.S. to run a trade deficit. (…)

Sustained demand for dollars overseas causes the greenback to be perpetually overvalued, the idea goes. This overvaluation kneecaps exporters, inhibiting a natural rebalancing of the trade account. And the longer these imbalances persist (and the more debt the U.S. government, households and companies take on), the less stable the global financial system becomes.

Tariffs are one potential fix, insofar as they disrupt the trade flows that match these financial flows. (…)

The real danger is that we get the narrower, more practical version: controls focused on the market for Treasurys. U.S. government securities “become exported products which fuel the global trade system,” Stephen Miran, now chairman of Mr. Trump’s Council of Economic Advisers, wrote in a widely circulated paper. “In exporting [those securities], America receives foreign currency, which is then spent, usually on imported goods. America runs large current account deficits not because it imports too much, but it imports too much because it must export [Treasurys] to provide reserve assets and facilitate global growth.”

Mr. Miran helpfully summarized three potential “solutions” to this “problem.” One is the “Mar-a-Lago Accord” you keep hearing about. This is shorthand for U.S.-coordinated global action by foreign governments to devalue the greenback and revalue other currencies. The inspiration for both the concept and the name is the Plaza and Louvre accords of 1985 and 1987, respectively, which arrested a rapid dollar appreciation. Mr. Miran’s second idea is for the U.S. to accumulate its own foreign-exchange reserve of foreign governments’ bonds to manage the dollar exchange rate.

The third proposal counts as the single worst idea ever floated by anyone associated with either Trump administration about anything: a tax on foreign holdings of Treasury securities. (…)

Such a measure, which Mr. Miran dubbed a “user fee,” would withhold some portion of the interest payments Treasury remits to foreign governments that own American bonds. (…)

The real link between the dollar, foreign investors and the trade deficit is that America’s status as issuer of the world’s preferred safe assets means the rest of the world is happy to buy as much debt (government or private) and equity as we sell to finance our political choice to subsidize domestic consumption—a political choice that is popular here in the U.S.

Or rather, the rest of the world is happy to buy that debt so long as we’re not defaulting on it. And make no mistake, such a capital tax would be a default. That’s what one calls it when a debtor unilaterally reneges on all or part of a promised repayment.

The great folly of a capital tax on Treasurys is that it would undermine the desirability of those assets even as our fiscal deficit continues to rage more or less out of control. I argued last week that Mr. Trump’s trade protectionism is a roundabout way of avoiding politically painful entitlement reforms. Wait to see how excruciating such budgetary decisions will become if Washington faces a sustained global selloff of Treasurys.

Here and there:

For the U.S. economy as a whole, exports to China are a small slice of a $29 trillion gross domestic product. But “if you’re a U.S. soybean farmer, this is just about the biggest issue going at the moment,” said Neil Shearing, an economist at Capital Economics.

U.S. Agriculture Secretary Brooke Rollins promised on Sunday that farmers would be bailed out if hurt by the president’s trade war.

Prologis said its customers, which include Amazon.com, Home Depot and FedEx, have been rushing in merchandise, rerouting shipments and taking on overflow storage space as they seek to get ahead of President Trump’s new tariffs.

Meloni “has an advantage on the EU mediators — she is talking to the decider”, said Stefano Stefanini, Italy’s former ambassador to Nato. He said her meeting with Trump could be useful for the EU to find out what he wanted. “The US trade representative doesn’t really know [that]“, Stefanini added.

• Trump gave little public hint of his demands of the EU in exchange for rolling back the tariffs. “I am not a big fan of Europe and what they’ve done with immigration,” he said. “They’ve got to get smart.”
• Stefanini said Washington could press for Europe to further distance itself from China. “If the EU makes a deal with the US, it will be forced to further de-risk or decouple from China as a consequence. It’s either China or the US.”
• “When you engage Trump on the basis of ‘national interest’, that’s his favourite language,” Stefanini said. “He might not give in, but it is something that he understands. If you talk to him about transatlantic solidarity, that is a waste of time.”

Tech industry fears Donald Trump’s trade war will hamper US AI ‘dominance’

Industry insiders, including tech executives, supply chain experts and analysts, said the US president’s escalating trade war is likely to hinder the expansion of American computing power. This is because the measures may drive up costs for building semiconductor fabrication plants and AI data centres in the US. (…)

“I am much more worried about the impact on a single component in a given data centre that may be delayed now because some [overseas] supplier is making a decision about their business,” said a person involved in the development of Stargate, the US $500bn data centre project being led by OpenAI, SoftBank and Oracle. “These are fairly complex builds [which can be] delayed because of a switch for the fans.” (…)

Altana, a research group which maps global supply chains said the China tariffs alone mean American data centre developers face an increase in annual costs of more than $11bn. (…)

“Even if the GPU itself is exempt from tariffs, you are still going to get hit by massive costs in the US if tariffs still apply to the components,” said Ahmad. “The number of product categories is so vast, and the smallest component can bring your supply chain down.”

(…) semiconductor production in the US would still be more expensive because the tariffs push up prices for key tools and materials.

“The threat of the US kneecapping itself in the ability to rebuild onshore manufacturing is real,” he said. “It will be cheaper to build manufacturing capacity outside the US, while companies with the highest share of US manufacturing stand to lose the most.” (…)

“[Amazon is] not going to demand that we have the chip made in the US because it will take years to build the capacity and build the product,” the person added. “But we will not lower our prices — if we do, we’ll be screwed by the US government because we would be frustrating their policy of forcing people to make all chips in America.” (…)

• US rare earth champion faces trade war test after tariffs halt China sales MP Materials has been sending concentrates to Chinese partner as it races to expand in US

The US miner central to America’s efforts to build a domestic rare earths supply chain has halted shipments of its concentrates to China after being caught in the trade war between the two countries. (…)

But the company still sold most of its output of rare earth concentrate to China, the world’s main processing and separation centre for such materials. Those sales have come to a halt, three people familiar with the matter told the Financial Times. One said China’s retaliatory 125 per cent tariffs on US products had made the sales uneconomical. (…)

Gracelin Baskaran, a critical minerals expert at the Center for Strategic and International Studies, said there was a question over whether the US government would step in to support MP. (…)

“Selling these critical materials under 125 per cent tariffs is neither commercially rational nor aligned with the national interest,” the miner said. MP added it had invested nearly $1bn to restore a full rare earth supply chain in the US. It said it was now using a refinery in California to process half of its production output and selling almost all of that material outside China. (…)

So far, MP has been able to separate and process light rare earths but not the equally essential heavy rare earths, particularly dysprosium and terbium, needed to make high-performance permanent magnets and which go into F-35 fighter jets, cars, MRI machines and other electronics.

Beijing’s April 4 export controls have almost entirely halted outbound shipments of heavy rare earths as officials put in place a licensing regime, Chinese market participants say. (…)

For the time being, China is the world’s only source of separated heavy rare earths, analysts say.  “The US has two choices — we’re going to have a supply chain disruption or we can negotiate,” said Baskaran of the CSIS. “It’s going to be painful.” “China went for our deepest vulnerability. They didn’t go for the one that we’re highly vulnerable in, just the one we’re completely vulnerable in,” she said. (…)

Nvidia chief Jensen Huang flies to Beijing for talks Meetings with Chinese vice-premier and DeepSeek founder come after US clamps down on chipmaker’s sales to China

(…) Huang said China was “a very important market for Nvidia” and expressed hope that his company could “continue co-operating” with the country, according to state broadcaster CCTV.

On Tuesday, Nvidia said it expected a $5.5bn hit to earnings from new US export restrictions on its H20 chip, a lower-powered model that had already been designed to comply with Joe Biden-era controls limiting exports to China.

Huang’s talks indicate that Nvidia is not willing to give up on the Chinese market and is considering designing yet another chip for it even though its previous efforts have been banned by Washington.

Plans for the Nvidia chief’s visit to Beijing were finalised after US President Donald Trump’s unexpected move to ban the H20 chip. The group reported $17bn in sales from China last year, but faced growing threats to its business from Beijing even before Trump interceded.

In previous trips to China, Huang has shied away from publicised meetings with high-level officials. (…)

China has pushed to build up its domestic semiconductor industry and directed domestic tech companies to buy Huawei’s AI chip. The Chinese tech champion is working to address difficulties in using its Ascend AI chip for model training, which has left domestic companies reliant on Nvidia. Huang has called Huawei “China’s ‘single most formidable tech company’”. (…)

FYI:

A humanoid robot and robot dog perform while on display at Robot World in Beijing today. Humanoids will compete for the first time in a half-marathon Saturday in Beijing. (Axios)

This is called “capital flight” It usually only happens to poor countries, and it never ends well.

(…) It’s important to realize that this is not typical for a trade war. Usually, when you put up tariff barriers, your currency gets stronger, not weaker.1 That’s how it went when Trump put up tariffs against China in his first term.

That’s not what’s happening now, though. What’s happening now is that a bunch of investors are selling large amounts of U.S. bonds and other assets. (…)

But ever since Trump announced his “liberation day” tariffs, that long-standing correlation has suddenly and dramatically reversed:

(…) The Economist has a good explainer on this, and Allie Canal has a good thread about it as well. Basically, Trump’s tariff announcements — and his later partial walk-back — caused a lot of volatility in markets, which caused a lot of Wall Street traders’ bets to blow up. That meant the traders had to raise cash in order to pay back loans they had taken out in order to make those bets. And the easiest way to raise cash quickly is to sell Treasury bonds. So this was probably part of what was going on.

But this doesn’t explain the fall in the dollar. Normally, when Treasuries get sold off, people park their money in cash, instead of moving it overseas. This time, a bunch of investors actually pulled their money out of America entirely.

In other words, for the first time in many decades, the U.S. has experienced capital flight. And if it continues, the consequences for the U.S. economy could be absolutely dire.

Could this have anything to do with that?

Federal law and Supreme Court precedent say presidents cannot fire the Fed chair over a policy disagreement.

But the Trump administration is asking the Supreme Court to overturn that precedent and let the president fire the heads of independent agencies.

The conservative court has generally sided with Trump in his push for more power to fire federal officials, but even a ruling in his favor in this case may not apply to the Fed.

“I don’t think that that decision will apply to the Fed, but I don’t know. It’s a situation that we’re monitoring carefully,” Powell said yesterday. (Axios)

More than Just a Pre-Tariff Shopping Spree Despite Wilting Sentiment, Q1 Consumer Spend Now Looks Less Dreary

Worries about tariffs may be weighing on confidence and lowering expectations to levels not seen since the financial crisis, but you’d be hard-pressed to find evidence of that in today’s retail sales report. Retail sales jumped 1.4% in March and while some gain is attributable to a pull-forward in demand ahead of tariffs, the underlying details suggest consumers are still spending.

Yes, some households are getting major purchases in before tariffs bite. The biggest gainer in today’s report is autos (+5.3%) where vehicles are moving off dealer lots faster than at any time since the post-pandemic demand surge earlier this decade. Households are also hitting up their local garden supply & building material stores where receipts grew 3.3% in March.

So yes, consumers are playing a bit of beat-the-clock with tariffs, but there is more to the story here. It may be difficult to reconcile, but once again, consumer spending is managing to avoid the gravitational pull of all the negative dynamics that might otherwise hold it back.

Recall that the worst of the recent equity market volatility did not take place until April. March was simply a strong month for retail sales. (…)

After the volatile start to the year, control sales rose a trend-line 0.4% in March, which tells us consumers keep spending. This should provide some support for first quarter spending and suggests even as consumers have front loaded some big purchases, they’re still spending on retail.

Consumers also spent more at restaurants in March, and we’re not aware of a way you can front-run tariffs with a nice night out. Sales at food services & drinking places leaped 1.8%, a key signal that while spending may be slowing consumers have not gone into hiding when it comes to discretionary spending. We don’t read too much into the pullback in gasoline sales, which looks mostly price related.

How consumers act in these next couple of months will be telling. To the extent recent strength is due to a conscious pull-forward in demand, we may be due for some serious payback in April and May. A household that bought a car in March ahead of tariffs, likely isn’t buying another one in May. In fact the new car payment might curtail spending in other categories. (…)

Source: U.S. Department of Commerce and Wells Fargo Economics

Americans got a nice energy break in March as CPI-energy dropped 6.1% MoM after –0.9% in February. In particular, gasoline prices are down 7.3% in the last 2 months, freeing much pocket change ahead of tariff impact.

The boom-bust in progress seems world-wide:

(…) companies around the world rushed to bring forward their deliveries to the U.S. to avoid any surcharges, temporarily boosting manufacturing output and leading to a sharp increase in exports of goods to the United States. (NBF)

Powell Warns of ‘Challenging Scenario’ for Fed as Trade War Rages Sees strong likelihood that consumers face higher prices while unemployment rises because of tariff increases

Federal Reserve Chair Jerome Powell warned that the central bank could have less flexibility to quickly cushion the economy from the fallout of President Trump’s trade war, sending stocks down on Wednesday.

Powell said he saw a “strong likelihood” that consumers would face higher prices and that the economy would see higher unemployment as a result of tariffs in the short run.

This would create a “challenging scenario” for the central bank because anything it does with interest rates to address inflationary pressures could worsen unemployment, and vice versa, he said. “It’s a difficult place for a central bank to be, in terms of what to do,” Powell said during a moderated discussion at the Economic Club of Chicago.

In some ways, the Fed’s problem resembles that of a soccer goalie who must decide whether to dive to the right and focus on inflation or to the left and address weaker growth as an opponent takes a penalty kick. “We’ll make what will no doubt be a very difficult judgment,” Powell said. (…)

Powell also hinted that the central bank could give priority to its inflation goal over its labor-market mandate if the two were in conflict. The Fed would attempt to balance the two goals, “keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans,” he said.

The Fed’s focus, he said, will be to ensure that any one-time increases in prices from tariffs don’t fuel more persistent price increases. (…)

Powell pointed to carmakers and their assembly chains as one example of economic activity that could be “disrupted significantly” by tariffs. (…) “When you think about supply disruptions, that is the kind of thing that can take time to resolve and it can lead what would’ve been a one-time inflation shock to be extended, perhaps more persistent.” (…)

“For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” (…)

John Authers:

(…) The Federal Reserve often uses the power of the jawbone and what it says matters a lot. If people react to a warning, the Fed can even have its desired effect without needing to do anything. Because central bankers have to mind their words, mere choice of subject can be most significant.

For a prime example, Fed Chair Jerome Powell triggered a big afternoon selloff by talking frankly — but without saying anything anyone didn’t know — in a discussion at the Economics Club of Chicago. He admitted that there “isn’t a modern experience for how to think about this:”

Our obligation is to keep longer-term inflation expectations well-anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension

More or less everyone is alive to the risk that tariffs could both raise inflation and lower growth, and hammer both sides of the Fed’s mandate. The fact that Powell said so, however, along with the explicit assertion that higher prices due to tariffs might push up inflation expectations, was a sign that he wouldn’t resort to rate cuts at the first sign of trouble. He might easily have dropped such a hint — and many traders were furious with him for not doing so.

Trump says Powell’s “termination can’t come fast enough”

It’s the strongest suggestion yet of the president’s intentions to try to fire the nation’s most powerful economic policymaker. It comes on the heels of the Fed chair saying tariffs would reignite inflation and slow economic growth.

“The ECB is expected to cut interest rates for the 7th time, and yet, “Too Late” Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete “mess!,” Trump posted on Truth Social.

Powell’s term as Fed chair ends in May 2026. He was initially nominated by President Trump in 2017, and appointed to another four-year term by Biden in 2022.

NY Fed Survey of Service Firms

Survey conducted April 2-9.

Business activity in the New York-Northern New Jersey region fell at a substantial pace for a second consecutive month, according to the April survey. The headline business activity index came in at -19.8. Twenty-one percent of respondents reported that conditions improved over the month while 41 percent said that conditions worsened.

The business climate index fell nine points to -60.7, its lowest level since early 2021, with two-thirds of respondents saying that the business climate was worse than normal.

The employment index moved up to 1.3, indicating that employment levels were little changed. The wages index held steady at 34.8, a sign that wage increases remained moderate.

After rising to its highest level in nearly two years in March, the prices paid index was little changed at 57.6. The prices received index edged down to 26.0. The supply availability index fell nine points to -11.7, suggesting supply availability declined.

After plunging twenty-five points last month, the index for future business activity sank another twenty-three points to -26.6, its lowest reading since April 2020, indicating that firms expect a significant decline in activity in the months ahead.

The index for the future business climate also fell twenty-three points, to -50.0, marking its lowest level since 2009 and suggesting the business climate is expected to remain considerably worse than normal.

The future employment index turned negative. The future supply availability index dropped to -36.1, with 44 percent of firms expecting supply availability to be worse in six months. Capital spending plans turned sharply negative.

Forward looking charts:

Note that both Current and Expected Business Activity are at mid-2008-09 recession levels. This is services, only indirectly impacted by tariffs.

Tariffs Risk Higher Costs at New US Nuclear Plant, Says Builder

What the Weak Dollar Means for the Global Economy Currency’s dramatic slide will hit overseas exporters and raise pressure on central banks to cut interest rates

(…) The dollar decline has been historic, with the ICE U.S. Dollar Index, a measure of the greenback against a basket of currencies, slipping 8% this year, the worst start to a year in the index’s four-decade trading history. (…)

“For exporters, you’re not getting the currency eroding some of the tariff impact for the end U.S. consumer,” said Derek Halpenny, the London-based head of global markets research for the Japanese bank MUFG. “It has a bigger negative impact for sure.”

A weak dollar makes the profits that foreign companies earn from their U.S. divisions worth less when translated back into euros or yen. It also makes the goods they produce more expensive for American consumers.

Japan’s Toyota is expected to face an earnings hit from the yen’s climb to 143 per $1 from 157 at the start of the year. For years, the weakness of the yen has been boosting profitability at Toyota and other large Japanese exporters. (…)

Deutsche Bank cut its earnings forecasts for companies in the Stoxx Europe 600 index to 4% from 6%, citing weakening demand and the strength of the euro. The bank warned it could shave another percentage point of its growth forecast if the euro stays at its current level. (…)

Economic textbooks teach that foreign currencies tend to weaken when economies are hit with tariffs, helping to make goods cheaper to offset the cost of the levies.

Instead, investors have reacted to Trump’s back-and-forth trade policies by dumping U.S. assets, unwinding huge bets they made in recent years on the idea that the U.S. would economically outshine the rest of the world. As investors sell U.S. dollar assets, they recycle them into home currencies, pushing up their value. (…)

The currency reversal will likely mean fewer and lighter-spending American tourists (…).

The European Central Bank and Bank of Korea are both expected to deliver quarter-point reductions on Thursday. Switzerland’s central bank isn’t scheduled to meet again until June, but some investors believe it could deliver an emergency rate cut to help bring down its currency. The franc has risen more than 10% this year against the dollar, raising the specter that the country will face deflation, while also making its signature exports such as watches and high-precision machinery more expensive. (…)

Bank of Japan Gov. Kazuo Ueda said Wednesday that tariffs are moving closer to a “bad scenario” that could lead the central bank to respond.

China has let its currency move close to its weakest level against the dollar in years. Some on Wall Street worry Beijing will push the yuan even lower to offset the effects of the trade war, a move that could ripple across financial markets. (…)

China seeks reset with EU amid Donald Trump’s trade war Beijing eyes rapprochement with Brussels to compensate for loss of US market but significant hurdles remain

(…) EU leaders have also publicly expressed the need for greater co-operation, a strong contrast to previous declarations stating a need to “de-risk” supply chains from Beijing. (…)

The US tariffs will accelerate the “trend of Chinese companies going global”, said Jaromir Cernik at CTP, a big investor in European industrial property. He added that Chinese demand for factory and warehouse space in Europe was growing. (…)

“Europe’s relationship with Beijing has been plumbing new lows due to growing trade imbalances, China’s support for Russia and a rise in Chinese cyber attacks across Europe,” said Noah Barkin of the Rhodium Group consultancy. “It is difficult, given this backdrop, to envision some sort of détente between Brussels and Beijing.” (…)

Term Premium Rising

The term premium in US Treasuries is rising. The market does not know if this is because of the fiscal situation, inflation expectations becoming unanchored, or discussions about who the next Fed Chair will be.

Some of the move higher in rates has been technical, driven by unwinds of levered basis trades and swap trades.

In addition, the move lower in the dollar is telling us that the move higher in rates is also because of foreigners selling Treasuries.

For example, Japanese investors have in recent weeks been significant sellers of foreign bonds, and this has been associated with a significant appreciation of the yen relative to the dollar. This does not necessarily mean that Japanese investors are questioning American exceptionalism. In fact, in 2022, when the Fed started raising interest rates, Japanese investors were also significant sellers of foreign bonds, see second chart below.

China Stocks Face Risk of $800 Billion US Outflows, Goldman Says

US investors could be forced to offload around $800 billion of Chinese equities “in an extreme scenario” of financial decoupling between the world’s two largest economies, Goldman Sachs Group Inc. estimates.

US institutional investors currently own about $250 billion worth of Chinese companies’ American Depositary Receipts, or 26% of the total market value, Goldman analysts including Kinger Lau wrote in a note dated Wednesday. Their exposure to Hong Kong stocks amounts to $522 billion and they own about 0.5% of China’s onshore equities. Together, that amounts to more than $800 billion worth of Chinese shares.

Goldman is joining a group of global banks that have started assessing the worst outcome for investors as the once-unthinkable prospect of a financial divorce between the US and China grows with an escalating trade war. Concerns about American stock exchanges kicking Chinese firms out, which became an issue during President Donald Trump’s first term, have resurfaced after Treasury Secretary Scott Bessent’s recent comment that all options are “on the table” in trade talks with China. (…)

They estimate that in a forced delisting scenario, ADRs and the MSCI China Index could see 9% and 4% valuation drawdown from current prices, respectively.

It may take just one day for US investors to complete sales of their A shares, while it may require 119 and 97 days to exit Hong Kong stocks and ADRs, respectively, Goldman estimates.

Meanwhile, in the same extreme scenario, Chinese investors might need to unload their US financial assets, which could amount to US$1.7 trillion, they wrote, adding that around US$370 billion of which would be in equities and US$1.3 trillion in bonds. (…)

Earlier, JPMorgan Chase & Co. estimated<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> that ADR delistings could lead to removal from global indexes, resulting in aggregate passive outflows of around $11 billion.

Drug Development Is Slowing Down After Cuts at the FDA The agency is missing deadlines and not responding to biotech companies, forcing some to push back clinical trials.