The “TACO” trade
The “TACO” trade
Markets rallied through May after the sharp falls in April and have recovered back above pre-Liberation day levels. What changed? If the cause of the fall was the tariffs, the recovery was based on the reverse. At times of peak market stress President Trump has hit pause and de-escalated, in what has been called the “TACO trade” – “Trump always chickens out”. While this is certainly a catchy acronym and it does certainly appear that market stress (notably in the bond market), has forced the President to back down, we still live with significantly higher tariffs than previously and the outlook is uncertain. After all we are only in a tariff pause, so the market’s reaction may prove to be unduly optimistic.
US markets have fully recovered from the “Liberation day” falls
Source: Artorius, Bloomberg
The S&P 500 index has been rebased to start at 100 on 31 December-2024.
On top of the elective pause in the tariff agenda, there was the legal pause imposed by the courts that we discussed last week. Subsequent to that initial judgement, a higher court has allowed the government to appeal and in the interim, there is no impact on the tariffs imposed. However, as and when this case is heard at a higher level, and this may well end up at the Supreme Court, there is a high chance that the President will be prevented from imposing the broad brush tariffs that we have seen.
While the courts may restrict the President’s ability to enact broad based tariffs on the rest of the world, he retains certain powers1, and in response to the court’s ruling and the “TACO” jibes, he doubled down on them, increasing tariffs on steel and aluminium to 50%. But for how long? As with much of the tariff announcements, this would appear again to be an act of economic self-harm.
Steel and aluminium are “intermediate goods”, that is they are used in the production of other goods, rather than being consumed directly by individuals. Therefore, any increase in price feeds directly into increased costs for other industries, and in the US, these are much larger industries.
The US steel industry is a relatively small, capital intensive industry, employing around 86,000 people directly2, whereas the US auto industry, which is a significant user of steel, employs around 3m people3.
So, these newly adjusted tariffs will raise costs and prices for the auto industry which employs 30 times more workers than the steel industry. While there may be scope for US steel companies to increase profitability and expand, the impact on other, much larger, US industries will be more significant. This does not make economic sense.
There are still many unknowns around tariffs and further trade deals are likely to be signed. What is clear, is that trade related uncertainty for businesses, particularly in the US, remains high and will act as an economic headwind as businesses defer investment and consumers hold back on large ticket items.
What has been less clear is when the impact from tariffs would start to show meaningfully in economic data, with May/June data the most likely and on queue came the latest ISM survey data. Both the Manufacturing and Services index dropped below 50, which is indicative of contraction and there was notable weakness in new orders. If the trend continues, both the economy and markets may force the President’s hand.
1 In the case of steel and aluminium tariffs he is using Section 232 of the Trade Expansion Act of 1962, which allows tariffs in the name of national security. It is likely that if other tariffs are blocked, that these powers will be more widely used, potentially expanding into other sectors such as semiconductors and pharmaceuticals.
2 Source: St Louis Federal Reserve
3 Source: US Bureau of Labor Statistics
Economic survey data is pointing to a US slowdown
Source: Artorius, Bloomberg
ISM = Institute of Supply Management. Their monthly surveys are a key indicator of the state of the US economy.
“Big Beautiful Bill” or “Budget Busting Abomination”
The bromance between President Trump and Elson Musk is over. Musk has left the inner circle and is now attacking the President’s signature tax-bill calling it a “disgusting abomination”. We would tend to side with Musk with this as the bill’s unfunded tax-cuts threatens a Liz Truss style reaction, which we wrote about in our latest Investment Outlook. The bill itself has passed the House of Representatives and must now pass through the Senate, which despite a 53-47 Republican majority may prove more challenging with Musk providing cover (and potentially money for re-election campaigns), for concerned senators.
One part of the bill that has drawn particular interest is Section 899. This clause would authorise the Treasury Secretary to designate certain countries as "discriminatory" and allow the administration to impose retaliatory taxes on both companies and investors from these designated countries. This clause may not survive to become law, but if it does, it would provide President Trump with another tool he could use to negotiate with and/or punish other countries – one enshrined in legislation. This could be another reason for foreign investors to reallocate away from the US and have implications for an already weak US dollar, US treasuries and equities.
Gareth Thomas
Head of Investment Management
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