Recession Fears May Return Just as Tariff Uncertainty Heats Up

Stocks and the dollar are in trouble with US trade policy in limbo and recession on the march

• Global markets seesaw as US courts block the Trump tariff agenda.
• US trade policy Uncertainty may now extend longer than expected.
• Incoming US and China PMI data may revive global recession fears.

Financial markets seesawed as two US federal courts moved to block the Trump administration’s expansive tariff hikes. The US Court of International Trade struck down so-called “reciprocal” duties as well as those ostensibly aimed at cajoling China, Mexico and Canada to do more on stemming the flow the fentanyl and its precursors into the US.

Those levies were based on a 1977 law called the International Emergency Economic Powers Act (IEEPA). The White House argued that persistent trade deficits as well as the fentanyl abuse crisis amounted to justifiable national emergencies covered by the act, which then gave Mr. Trump the authority to “regulate” imports. The court disagreed.

Financial markets seesaw as federal courts block US tariff plans

A similar ruling striking down the administration’s application of IEEPA came from D.C. District Court Judge Rudolph Contreras. He called the tariffs “unlawful” and ordered a preliminary injunction on collecting the duties, but stayed the order for 14 days “so the parties may seek review in the Court of Appeals.”

Futures tracking major US stock indexes surged as the news hit the wires, with contracts on the bellwether S&P 500 as well as the tech-tilted Nasdaq 100 jumping to the highest levels in two months. The US dollar jumped upward against major currencies, yields pushed higher as bonds declined across maturities, and gold prices slumped.

That first reaction proved to be short-lived, however. Traders’ exuberance burned bright for about four hours in Asia-Pacific trade, then hit a wall. A rapid swing in the opposite direction kicked off as European bourses came online and played through most of the US cash equities session.

Can the Trump administration revive tariffs by other means?

Wall Street has erased all of its gains. On average, the major US indexes are limped into the close with modest losses, while bonds finished the session on the upside. The dollar lost about 0.5% against a basket of its top counterparts and gold prices rose nearly 1%.

The turnaround probably reflects the added uncertainty that the rulings have introduced into US trade policy. The administration promptly appealed the ruling and is likely to cite other laws, like the 1974 Trade Act, to try reinstating the tariffs. That might create a five-month window in which today’s IEEPA block might be overturned.

Tariffs based on this law or the Trade Expansion Act of 1962 remain in place. Mr. Trump and company may try to reframe their full protectionist agenda in these terms, but the justification process involved is cumbersome and time-consuming, especially if all major US trading relationships have to be managed at once.

US and China PMI data may fuel global recession fears

Against this backdrop, purchasing managers index (PMI) data from China and the US are expected to show that both countries’ manufacturing sectors contracted in May. This implies that outsized restocking to front-running the tariffs – a key tailwind for growth so far this year – has run out of runway.

Meanwhile, revised first-quarter US gross domestic product data confirmed the weakest consumption in almost two years despite businesses shielding consumers from tariff costs. Updated consumer confidence data from the University of Michigan (UofM) is expected to confirm the most downbeat settings since post-COVID lows in mid-2022.

Taken together with prolonged uncertainty about trade policy and a Federal Reserve reluctant to cut interest rates, all this may boil down to recession speculation. If so, stocks and the US dollar may succumb to selling pressure while Treasury bonds and gold prices extend upward.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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