The world is more scared of Trump than America is

Another day, another US sharemarket record. All’s well in the United States, despite Donald Trump’s tariffs, his debt-funded spending binge and his assault on the Federal Reserve Board’s independence.

There’s an apparent disconnect between the performance of the sharemarket – and the US bond market for that matter, where rates have been quite stable – and the turbulence of the first six months of the second Trump administration.

Wall Street is at record highs despite the turbulence of Donald’s Trump administration.Credit: Bloomberg

In fact, the performance of the markets reflects an enthusiasm for what Trump has done and is doing. Wall Street is celebrating, although as the market adages say, Wall Street isn’t Main Street, and the sharemarket isn’t the economy.

At face value, there’s good reason for the markets to be calm, bordering on ebullient.

So far, while the US inflation rate has ticked up a little, economic growth remains quite solid, the unemployment rate is at historically low levels (4.1 per cent) and consumer confidence and spending have rebounded from their jittery experience when Trump unveiled his tariff plans in April.

Investors have dismissed the import of Trump’s tariffs which, if they are implemented as now described, would lift the average effective tariff rate in the US from 2.5 per cent at the start of the year to somewhere around or even above 20 per cent – the highest rate in more than a century. Today, the rate is about 15 per cent.

They are also ignoring continuing attempts to undermine and even force Jerome Powell out of the chair at the head of the Fed’s board table.

Using the obvious pretext of criticism about a blowout in the cost of renovating the central bank’s Washington headquarters, Treasury Secretary Scott Bessent’s call this week for an inquiry into the Fed’s performance and the likely early nomination of his successor – a “shadow” Fed chair – show the administration is trying to undermine the credibility of, and ramp up the pressure on, a man they know they can’t fire except “for cause”.

Either Trump’s tariffs or the attempted assault on the independence and reputation of the Fed would normally cause conniptions in financial markets.

Yet, they sail serenely on. The S&P 500 is up more than 7 per cent this year, the Nasdaq is up 8.6 per cent and the AI-driven bigger technology stocks, as a group, are up 15 per cent. Bond yields, at both the short and long ends of the yield curve, have fallen since the start of the year.

The apparent complacency of investors could be explained by the “TACO” trade – a conviction that Trump Always Chickens Out – but that would suggest a lack of sophistication and awareness.

Wall Street is brushing off the effects of the Trump chaos.Credit: Bloomberg

Trump’s tariffs are real.

His 10 per cent baseline tariffs are in place, as are his sectoral tariffs on steel, aluminium, copper, autos, auto parts, small packages, and imports from China and some from Canada and Mexico.

His punitive “reciprocal” tariffs are scheduled to go live on August 1. Whether or not they are as draconian as those unveiled on April 2, they will exacerbate the existing effects of Trump’s trade wars and lengthen the time it takes before the full effects of the tariffs are felt and can be assessed.

Trump’s transparent attempts to force the Fed to cut US interest rates and his foreshadowing of the appointment of a Fed chair who will accede to his wishes are also very real.

Rather than chickening out, as he did when he deferred the introduction of the reciprocal tariffs he announced on April 2 after the markets shuddered, Trump now seems emboldened by the return of investor optimism.

Whether the market calm will survive when the reality of Trump’s reciprocal tariffs hits home in 10 days or when he appoints his “yes man” to be Powell’s successor is the trillion-dollar (multitrillion-dollar?) question.

Investors ought to be concerned about Trump’s tariffs because they are already having an impact on inflation and some corporate profits.

Last week’s June inflation data, while apparently benign, did blip up to 2.7 per cent (the Fed’s target is 2 per cent) and there were material increases in the prices of those goods most exposed to the tariffs already in place, even though importers had rushed to stockpile their imports to get ahead of the imposition of the tariffs.

Those indications of rising inflation can only strengthen as those inventories are run down and the cost pressures on US importers – who pay the tariffs – rise. Already, retailers and others are talking about price rises to offset the tariffs’ cost.

On Monday, Stellantis, the manufacturer of Chrysler, Jeep, Ram, Peugeot and Fiat vehicles, announced a €2.3 billion ($4.1 billion) first-half loss.

It said the tariffs cost it €300 million after factory shutdowns had caused a 25 per cent reduction in deliveries of its cars to US buyers. It also wrote off another €300 million from the value of clean air credits that it held after Trump’s One Big Beautiful Bill (the Republicans’ budget bill) removed the penalties for companies’ failure to comply with clean air standards.

Fed chair Jerome Powell has been a constant target of Trump’s attacks.Credit: Bloomberg

General Motors, which also reports this week, has said the impact of Trump’s tariffs would cost it about $US4.5 billion ($6.9 billion) this year. It imported nearly half the cars it sold last year from Mexico and South Korea.

So far, the tariffs haven’t had a material impact on the price of cars – they actually fell in June – or the volumes sold. That may be because buyers acted to get in ahead of the tariffs, as they may have done in other categories. That would explain the reasonably healthy retail sales numbers.

As the impact of the tariffs gradually shows up in companies’ costs while their inventories run down and their capacity to absorb those costs lessens, there will be price rises and increased inflation, and inevitably, a response from consumers.

There’s also the impact of the One Big Beautiful Bill, which added a range of new tax and spending measures to Trump’s 2017 tax cuts for companies and the wealthy. The Congressional Budget Office’s most recent update of the impact of that legislation is that it will add a net $US3.4 trillion to US government debt over the next decade.

Foreign investors, it seems, are more wary of the Trump trade and central bank agendas than the locals.

The bill is stimulatory at a time when inflation is just starting to accelerate.

In those circumstances, Trump’s repeated demand for the Fed to cut its policy rate by 3 percentage points would look ludicrous, and the markets would start to fear rising, not falling, interest rates.

Any undermining of Powell before his term expires next May, or the appointment of someone obviously going to try to do Trump’s bidding, would also see the US yield curve steepen.

The yields on short-term securities would fall in expectation of a lower federal funds rate (analogous to the Reserve Bank’s cash rate), but the yields on longer-term bonds would rise to compensate for the probable hike in inflation rates.

The mixture of Trump’s tariffs and the politicisation of the Fed would probably affect both economic growth and the inflation rate.

With the S&P 500 trading at 27 times the earnings of its constituent companies last year and 22 times the bullish forecasts for this year’s earnings, any significant rise in market interest rates would have a very material impact on share prices.

For the moment, because the data has yet to reflect anything other than the earliest impact of Trump’s less impactful tariffs, the only dissonant note within the markets is being sounded by the market for the US dollar, which has lost more than 10 per cent of its value this year.

Foreign investors, it seems, are more wary of the Trump trade and central bank agendas than the locals.

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