Mini Market Lookback: Collision Courses ‘R’ Us

A bizarre week obscures the coming convergence of macro factors that would hit the micro level hard unless Trump changes course.

Mar 02, 2025

Was it the skills, the speed, the swerve, or the impact?

Equities were weak on balance based on market weights and credit spreads widened, but the UST curve was rallying for the wrong reasons with cyclical anxiety rising, consumer sector metrics wavering, and people coming to the realization that the ingenious strategic and tactical benefit of the doubt awarded to Trump tariff threats might actually end up as real policy plans and very tangible economic pain (see Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25, Reciprocal Tariffs: Weird Science 2-14-25).
The tariff target list is getting to be like the Blue Plate Special on new nations in the crosshairs, new product targets (autos, pharma, semis, steel, aluminum, copper, lumber), new timelines with start-and-stop effective date gamesmanship, new increases (China another 10%) and some that require Section 232 reviews to meet legal requirements (e.g., copper, lumber).
The Trump-Vance tag team on Zelensky made for tragicomical drama that had already seen the table set with earlier pro-Putin rhetoric and UN votes. The unequivocal Russia support from the US at the UN adds up to an oil supply X-factor as 2025 proceeds and the keeper of the sanction flame (Trump) casts his vote for Russia. The spectacle of Trump vs. Zelensky also pissed off the EU (ex-Orban) at a time when trade wars are brewing and simmering animosity might color retaliation strategies.

There will be many opinions on what the dramatic shift in policies (tariffs, deportation, deficits, inflation, Putin love, etc.) means for the markets, the global and US economy, the consumer, and the yield curve. As highlighted above, there is a reason that investors see some signs of trouble and a flight-to-quality pattern on higher macro risks that are creeping into UST pricing.

The YTD UST deltas detailed above have been good for duration, but the underlying drivers are subject to some debate since the inflation stories and backward-looking macro demand metrics and guidance from earnings season are not screaming worry and in fact signal strength on balance. The market needs to look forward, however, with major new and highly uncertain inputs – tariffs right at the top.

The chart above shows the price action during the past week in the UST markets. The moves signal that the markets are seeing trouble after a muted inflation release (see PCE Jan 2025: Prices in Check, Income and Outlays Diverge 2-28-25). Tomorrow’s UST supply worries are taking a back seat to today’s case of cyclical anxiety stemming from growing credibility challenges confronting Washington.

The eventual impact of what might come out of the budget process, debt ceiling discussions, and the political fallout from the DOGE chaos and the full embrace of Putin are still to play out. The “embrace” of Russia is objectively set by a UN vote and subjectively self-evident in commentary and the implied intent behind material “omissions” of fact (e.g. who invaded who, etc.). The applause from the Putin crown seems to confirm it also.

The Trump rant in the Zelensky Oval Office meeting included raving references to Hunter Biden’s bedroom and bathroom, “Shifty Schiff,” and “Russia, Russia, Russia” so Trump seems a tad preoccupied with supporting Russia as a means of self-defense (counterintuitive as that may be). Trump’s transcript is there for people to read, but the reference to Trump and Putin “going through a lot” together was a tad strange. This is all worrisome in the area of trade policy and the human nature factor on all sides.

Below we update some UST visuals of the yield curve shifts since the Oct 2023 peak of the UST 10Y.4

The above chart hammers home that we are still a very long way off from the Sept 2024 lows, but the biggest objective test lies ahead as massive tariffs on a global scale with all major trade partners in the crosshairs will be a major challenge. The timing and duration of the tariffs will be subject to the next round of Trump whims.

Listening to the rationale and descriptions of how tariffs work is a conceptual out of body experience. Trump as the decision maker still insists “the selling country pays” (not the buyer) and that he “collected billions and billions from China” in 2018-2019. His pitch of course starts with false facts.

We would hope that more media mavens take the risk of asking blunt, factual questions. The fear of dealing in facts can hurt the screen media guest opportunities and return appearance rates (“no interest, you picked on me last time”). The print media does not want to end up on the banned list as seen with the Associated Press and Reuters.

On that media note, the press question that was thrown at Zelensky asked why he does not wear a suit in the Friday fiasco was asked by a right- wing journalist (he works for a conspiracy nuthouse) who had access to the Oval Office along with a Russian TASS reporter (who was removed later). The “suit question” set the tone of disrespect early (everyone knows Zelensky’s mode of dress and why) came from a guy who sure did not look like he was on GQ’s short list for a cover opp (Looked more like had a bad night). He is not exactly a Pulitzer threat any time soon. He is also Marjorie Taylor Greene’s boyfriend. When there are denials that the meeting was a set-up, throw that “gentlemen” in the evidence pile for intent.

A colorful week with very dark geopolitical and economic overtones…

In a week when the US voted against the usual UN resolution to condemn Russian aggression against Ukraine, it only got worse. That means the US voted with North Korea (supplier of troops to fight on the ground to kill Ukrainians). Trump also declared the past week that the EU was “formed to screw the United States.” At that point, you knew it was going to be a bad week for geopolitics and how to handicap scenarios for tariff policy action and how trade partners (notably NATO allies) might be less inclined to look past tariffs as mere negotiation tactics.

We will not dwell on the fiasco of the White House ambush of Zelensky by Trump and Vance, but the reaction of the EU (ex-Orban) has underscored that such a tragically bad performance by the White House could color trade responses and economic planning. Trump may have set off some dynamics that might galvanize the EU into defense coordination and spending a lot more money.

In the past, the US can boast some Secretaries of State of impressive stature, but Marco Rubio took himself out of credibility contention this week. That leaves Musk with his endorsement of right wing AfD in Germany and increasingly strident view on leaving NATO.

Will bad geopolitical blood flow into the economic and industry level?

Our immediate reaction was thinking about the tariff plans by Trump and retaliation risk, which is the usual exercise in pondering tariff risk and “tariff retaliation.” At the sea level for narrow industries, there is the reality of oil prices (Russian supply) and LNG trade volume. The EU could have concerns around US reliability in trade and breach of contract potential as evident in the USMCA.

There is also the front burner topic of prime defense contractors and related risks and the need to build out European defense capabilities. That gets into the need of European nations to support the major players in the defense sector, which is a topic for another day. Among obvious subsectors to support is the aircraft side working on EU fighter capabilities and aircraft programs including Airbus vs. Boeing. We read numerous defense and aerospace sector trade rags, and there is a lot going on in defense companies in Europe broadly. There is only so much budget to go around, and European funds would be better served being directed to European defense players.

Some European defense players are ready for prime time but are not at the level of the major Prime Defense Contractor peers seen in the US. BAE Systems of the UK is an exception in the Top 10 below the US “Fab 5” of Lockheed, RTX (Raytheon), Northrop, General Dynamics, and Boeing. This past week could be the trigger point that unites more of the alphabet soup of parties but also fuels more cross-border EU/UK cooperation and M&A in the defense and aero sector. That would certainly impact procurement decisions and hit US contractors in a negative way as budget support gets allocated to “real allies” who are not in bed with Russia.

As crazy as it sounds, the US would be a defense procurement risk based on a developing alliance with Russia and the related threats to Poland, the Baltics, and the Balkans. We have already seen commentary from the senior level in the headlines around shared nuclear deterrents (UK and France as the European nuclear powers). We read numerous blunt statements from NATO countries that the US cannot be relied upon (with at least some naming “Trump” as opposed to the US).

In other words, this is getting past the “sticks and stones” stage and into the “urgent action required” stage. Trudeau getting on a plane to the UK and getting a very warm greeting and Zelensky getting broad unconditional support was about as close as the EU can get to “flipping the bird” to Trump. Everyone knows how well he responds to that. The question is, “When do tariffs stop being negotiation tactics and start becoming revenge and vendettas?”

For the EU especially, the additional tariffs added to the list the past week following a busy prior week of the same makes trade wars look inevitable with especially harsh action rolling in this coming week and a wave of global trade attacks getting teed up to start in early April. As we have covered recently, the consumer sector and health care threat is daunting. That is notably the case with Auto and Pharma tariffs that include the #1 and #2 import lines into the US from the world. The list includes the #1 import from the EU by far in the form of Pharma (see Mini Market Lookback: Tariffs + Geopolitics + Human Nature = Risk 2-22-25, Tariffs: The EU Meets the New World…Again…Maybe 10-29-24).

Tariffs: it’s just math and accounting reality…

Tariffs will “get real” for the partisan “fact-by-repetition” tariff proponents as the tariff costs start flowing along the cost and price chain and retaliation effects likewise. Blind partisan acceptance will get tested by actual transactions.

The headlines often obscure the details, and the tariff pileup ahead is going to do some serious economic damage considering the US is squaring off directly with over 2/3 of total US trade, including the Big 4 trade partners (59%). Additional battles will be brewing with Japan and South Korea if Trump does in fact tag autos with high tariffs (see Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25).

The concept and economic design of global supplier chains will be on the front burner very quickly as the negative multiplier effects remind the policy architects that reality lurks behind the big theme talks. Production chains will get slammed, production rates slow, unit costs spike and supply-demand imbalances drive shortages and inflation across a wider array of products.

For now, there is very little in place relative to the threat list with only the first round of tariffs on China, but this week supposedly will start Canada and Mexico. Now it gets real (unless delayed again), and the retaliation plans will get more visibility.

The 1-week return distribution for the 32 benchmarks and ETFs we watch was mixed at 18-14 but with all 7 of the bond ETFs positive including 5 of the 8 in the top quartile. The long duration UST 20+Y ETF (TLT) was #1 with the other bond ETFs at #5 through #8. The HY ETF (HYG) and Short UST 1-3Y (SHY) were in the second quartile.

The other members of the top quartile included the Financials ETF (XLF) at #2, Real Estate (XLRE) at #3 and Health Care ETF (XLV) at #4. With RFK Jr playing down the now-deadly measles outbreak and bird flu making more headlines, the Pharma sector will be interesting to watch.

Over on the right side of the list, we see the bottom quartile colored by tech weakness with the Equal Weight NASDAQ 100 ETF (QQEW) in last place with the Tech ETF (XLK) just ahead of it and NASDAQ also in the bottom tier. We see Midcaps (MDY) in the bottom tier with NASDAQ and the Russell 2000 just across the line at the bottom of the third quartile and the S&P 500 also in the red in the third quartile.

The tech bellwether and Mag 7 had a bad week with all of the line items in the above chart in the red for the week except the Equal Weight S&P 500 that was barely positive. We see 3 of the Mag 7 worse than -5.0% with Apple the best performer at -1.5%. The S&P 500 beat the Mag 7 this past week. For the 1-month period, only Apple posted a positive return in the mix above.

Tesla has been torched the past month with -13.3% this week driving a -26.4% trailing 1-month return. The running 6-month TSLA return is still riding the power and persona rebound of the Trump alliance. The flip side of the Musk disc is playing the DOGE single and that is hurting Musk. Unless Musk can get Bubba to give up his Chevy King Cab pickup or his pickup variant of choice, he will be losing a lot of customers in the future. Looking back 2 years with the two boom years of the S&P 500, Tesla is the worst performer of the Mag 7 and underperformed the S&P 500 and NASDAQ. The same is true looking back 3 years.

The above chart updates the running time series for the 10Y UST and the Freddie Mac 30Y mortgage benchmark. Getting back to the Sept 2024 lows is on a lot of duration wish lists, but the visibility of UST supply (post budget) and signals on the tariff economic transmission mechanism to price, volume, and unit costs beckons.

As a reminder, Trump 1.0 promised 4% GDP growth and the budget deficit gone in 8 years. We hit 3% once in 2018 (rounded up) with mid-2% handles in 2017 and 2019 before COVID and negative GDP in 2020 (see The Politics of Objective GDP Numbers: “Flex Facts” on Growth10-30-24). We also hit record deficits as % GDP in Trump 1.0 (see US Debt % GDP: Raiders of the Lost Treasury 5-29-23).

The HY market widened again, but remains inside levels seen at the end of the infamous bubble month of June 2007 (see Footnotes & Flashbacks: Credit Markets 2-24-25). In relative terms, the IG spread widened more as they moved out by +7 bps on the week to +88 bps vs. the +9 bps in HY to +287 bps.