If nothing else happens in the next 90 days, recession can be avoided

Outlook

We like to think that the PPI and CPI this week will have a big influence on the Fed outlook. No. That thing named Lag is at work and it will be July or so before we see inflation. CPI in March was 2.4% y/y and is forecast the same for April. Trading Economics’ own forecast is 2.5%. Core CPI was 2.8% and also forecast the same.

The bottom line of the 90-day pause in the US-China trade war is that the Fed has a lot less reason to cut rates in June. Bloomberg writes “…. expectations for a cut by the Federal Reserve have been rapidly repriced as investors reconsider the prospect of tariff-induced recession. At the start of May, markets had been expecting a 60% chance of a rate cut at the central bank’s June meeting. That’s since been reduced to an 8% probability, meaning markets are now forecasting two rate cuts this year versus three.”

That’s using Bloomberg’s own metrics. Using the CME FedWatch tool, 92% expect no cut in June and yes, on April 11 it was 64.4% expecting a cut in June. For September, those expecting at least one cut is now 80.7% as of noon yesterday.

Don’t count on any of this having a long shelf life, but if nothing else happens in the next 90 days, some normalcy will be restored and recession can be avoided (so only a slowdown)—until the next time Trump decides to try to stop the tide. Goldman Sachs cut its probability of s recession to 35% from 45%. That doesn’t exclude a painful slowdown.

The 90-day pause is not a Deal. Even if it goes on after the 90 days, we will still have empty shelves, a jump in inflation, and little tax revenue for the US that Trump fantasized could be passed on in tax cuts. Krugman wrote “The prohibitive tariff has been paused, not canceled. Nobody knows what will happen in 90 days. I’ve long argued that the uncertainty created by Trump’s arbitrary, ever-changing tariffs is at least as important as the level of those tariffs. Well, the uncertainty level has arguably gone up rather than down.” This is the opposite of “peak uncertainty” embraced the day before by a Big Bank strategist.

Further, Krugman says “I guess it’s good news that Trump slammed on the brakes before driving completely off the cliff. But if you think that rationality has returned to the policy process, that the days of government by ignorant whim are now behind us, you’ll be sorely disappointed.” We can say it faster: tigers and stripes.

We don’t know how much Trump is in retreat but retreat it is. The false narrative that the Biden economy was terrible and Trump will fix it is in tatters. He is now trying to recover the damage he has done without admitting that those other countries are not “ripping off America.”  Grievance is his modus operandi and sure enough, it appealed to enough voters to get him elected.

But he was misled by his advisors that the tariff gambit would raise revenue and appeal to the public. Polls show only about 35% approve of his handling of the economy, which is all tariffs, all the time. Analysts are even citing the Laffer curve again—yes, that stupid idea from the Reagan era—pointing out that there is a limit to how much revenue you can get from tariffs before they become counter-productive and bring down the economy.

Is it too late? Trump is going to pretend that others started the fire so he could heroically put it out. But he’s the one who started the fire. Now that this fire is under control—but still burning—he has to come up with something big and shiny to distract attention—all the while getting an actual China deal. At a guess, he will let Bessent do it. It’s not the TreasSec’s job, but never mind. Somewhere in the chaos to come, the hidden step to come will be to fire the tariff gang led by Navarro (who went to prison for him).

Big and shiny. Hmm, what can it be? Almost certainly something that will frighten the horses in the stock market and make them bolt, again.

Reuters’ Dolan puts it this way: “With the dramatic re-set of U.S.-China tariffs on Monday, the market completed the hair-raising round-trip it has been on over the past six weeks of trade angst. Punch-drunk investors are now assessing whether anything in the real economy broke in the process.”

Forecast

So much is wrong about the current US environment that even a shocker like the 90-day pause on the China tariffs cannot overcome it. The sugar high is already fading and nobody knows what the hangover will bring. Trump and Bessent are both in Saudi Arabia, so the triple exclamation point scary headlines are postponed for a few days. We suspect the consolidation will end like the others but not in a single day or two.

Tidbit: If the US is losing reserve currency status as well as whatever respect it used to have around the world, who takes its place? It has to be Europe. Bloomberg makes the case that this is an opportunity for the eurozone. Someone named Gramegna is the managing director of something named the European Stability Mechanism.

He says “In this environment, Europe is seen as a relatively more attractive and reliable partner with more stability, policy framework with rule of law and a believer in a rules-based trade framework.” He says the EU needs to hurry up and get a banking union and other reforms. Sound familiar? Mr. Draghi is only the latest to come up with needed unifying reforms. Meanwhile, other top officials are asking rude questions about Treasuries being the sole safe haven… and Bloomberg highlights that investors (unnamed) think the euro is just starting its journey to the top spot.

Fun Tidbit: Trump accepted a $400 million airplane from Qatar. He intends to refit it as Air Force One and take it with him when his term ends. Yikes! Not only is this a brazen bribe and a conflict of interest, it’s also illegal under the Constitution (the “emoluments clause,” Article I, Section 9, Clause 8). This prohibits any government official accepting "any present, Emolument, Office, or Title" from a "King, Prince, or foreign State" without the consent of Congress.

That includes the president, unless some court decides he is not a “government official.” Then there is the Foreign Gifts and Decorations Act of 1966 and some other laws. Weirdly, the president could accept the airplane if it were donated to him by an American citizen. The current Attorney General, Bottle Blonde Bondi, says the gift is okay. Turns out she was previously a lobbyist for Qatar. Imagine if Obama had done such a thing!

This is more than one guy being corrupt and a grifter. This is yet another active violation of the Constitution. More than one news outlet points out that it takes years to re-fit a giant airplane and Trump is the impatient 4-year-old. There will be, therefore, a security risk. Hair is on fire, even among Republicans.

Tidbit: Gold took a bath on the idea of a US-China trade deal, while money flowed into the stock market. Not so fast. Keep the faith in gold.

There are multiple reasons. First is that Trump will not behave properly and refrain from wild statements and wild acts. Second is that Congress and the courts will not take the correct actions to rein in the inmate wrecking the asylum, at least not in time. He will get impeached a third time, eventually, but it is already too late.

Third is lack of confidence that the Fed will do the right thing, whatever that is. The Fed admits it doesn’t now know what the right thing is. As of today, with the labor market okay and inflation inevitable, that is no rate cut anytime in the next 6 months. But Trump wants one. Be scared.  

This lack of confidence in the US system is coming to a head with the budget. The US runs out of money again in August, according to one reckoning. That means we must get a budget or close the government, again. It’s too soon to try to analyze the budget and its effects because it’s a work in progress and seeming facts change every hour, but it’s a good bet the bottom line is that cutting $163 billion will not actually be possible because a lot of that spending is mandated by Congress, as courts agree, and the DOGE savings are mostly false.

The current deficit is about $1.8 trillion on a budget of $6.75 trillion. This year the amount spent on the interest on the debt will exceed what we spend on defense, an oft-quoted statistic. This does pass the “So What?” test. Harvard economist Kenneth Rogoff, author of This Time It’s Different and Our Dollar, Your Problem, says the dollar will fall, hard, on global perception the deficit is too big. The extraordinary privilege the US gets—lower interest rates—is fading. That will subtract 0.5-1.0% from GDP.

That’s just the deficit’s effect on reserve currency status. It doesn’t include the loss of respect and confidence arising from all the other Trump negatives, including the grifting. The US has been getting away with excess deficits for a very long time and it hardly ever puts a dent in the dollar. Combine it with the horrible mismanagement in Washington and this time it may deliver.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!