Tariffs Patchwork Quilt
The administration’s approach reminds me of the musical Candide. In this work, Dr. Pangloss is continuously reminding us that we live in the best of all possible worlds. This proclamation takes place while disease and other pestilences are running rampant. And rather than worry about events, we should tend to our gardens. The only trouble is that our gardens today are sprouting many weeds.
The volatility last week was a bit breathtaking. The reversal after the pause made it quite clear the downturn in the markets was directly linked to the emerging tariff policies. Even a 90 day pause in the reciprocal tariffs will keep all parties speculating about what will happen next even though the pause is greatly appreciated.
Since our economy remains consumer driven, the recent readings are telling. The consumer confidence drop to 50.8 was significant but a reading below 50 would have been much worse. The rise in the inflation expectation gauge in the future to 6.7% is a very steep change in outlook. The tariff effect is ever present in these readings. We continue to be reminded that the consumer is holding up along with the economy and that these readings are heartening. The key question is how in the middle of the tempest will the stability persist.
Trading in equities is not being driven by the fundamentals at present. Momentum and market sentiment appear to be more important. Trying to take a long term approach to investing in this choppy market is particularly difficult.
Moving on to other key considerations, broad budget plans in the House and the Senate have been approved but await reconciliation. The $1.5 trillion of cuts included in the House plan await crafting into specific details. Most pundits agree that the aggregate number will be very hard to attain without considerable cuts to Medicaid. The larger healthcare institutions will continue to thrive even in the face of the NIH grant cutbacks. But the small and rural hospitals will be most subject to the cuts. We are certain that rating agencies have their internal lists for potential rating actions ready for when the actual cuts arrive. Blue states and red states will all be affected.
The challenge to bring the deficit down and to stop the growth in the federal debt have been elusive for years. We clearly need to address both but hopefully with a surgeon’s knife instead of a blunt instrument. Former Treasury Secretary Janet Yellen in the media today suggested that some selling of Treasury debt held by foreign entities may already be underway. Maintaining the dollar as the world’s currency should be taken very seriously. At what costs should tariffs be pursued to the desired ends?
We are back to 4.40% on the ten-year that is quite a bit closer to the 4.5% recent high. If we ever breach the 5.0% level again we will know that we are on the wrong path. Municipals were a bit whipsawed last week. We have two large transactions under consideration this week in New York City GO’s and LAX airport bonds. I would expect the sales to be orderly.
The calendar continues to build while demand is coming under considerable scrutiny. Any recent outflows caused by retail should abate after we pass the federal tax deadline. The shape of the curve continues to direct investors to the shorter end of the curve.
We have a budget coming out of Albany but the question remains how soon will it need to be revised. Spending remains on the heavier side. It will be informative to see what other states do in terms of making assumptions about growth and consumer behavior in the tariff laden landscape. Medicaid cuts will probably be unknown by the July 1 budget adoption date.
I would prefer to tell you to go tend your garden while all of these factors keep changing. It just does not appear to be right for the time.
John Hallacy
John Hallacy Consulting LLC
04/14/2025
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