Last week we had 'Liberation Day'. This week we had the reversal. Turns out the global economy can only handle so much liberation. The following is a compilation of stuff I've read on tariffs, the economic outlook, market impact etc.

Disclaimer: a lot of the below was read and collected pre Trump's U-turn but I think the questions covered still hold relevance. To start with, as Neil Dutta from Renaissance Macro points out, less has changed than you might think: genuine crisis risk has been averted/postponed but the economic outlook remains pessimistic, there are still huge tariffs - just now concentrated on China - and the Fed is still in wait and see mode.

Economic and market impact of tariffs and chaos

To start, how should we think about the impact of the past couple of weeks on the economy?

This and this (greater detail) from Goldman Sachs outline the basic channels through which tariffs can hurt: higher consumer prices and lower real incomes; tighter financial conditions; and policy uncertainty hindering investment, spending and hiring.

I would add the international element: retaliation hurts US exports. This doesn't include potential second-round effects such as tariff revenue funding growth-boosting tax cuts - but it should be clear by now that direct impacts are hard enough to track without going down the rabbit hole of indirect impacts. And the offset is going to be small anyway compared to tariffs over 100% on major trading partners and size 16 policy flip-flops.

On inflation, the key thing to look at is inflation expectations. These are the means by which a one-time inflationary supply-side shock becomes persistent, and they have been rising. You'd expect if the US economy tanks then eventually that will hurt prices but if expectations rise then there will be higher inflation in the short-run and weaker pass-through from suppressed demand to lower prices.

On the Fed, they will basically want to stay out of the headlines as much as possible. That means waiting to cut if market stability allows for it (see discussion of Treasuries below) and perhaps cutting fewer times. Trump chaos plus the basic logic of stagflation leaves me feeling pretty clueless at the moment about what the Fed will do for the rest of the year - whether growth effects will outweigh inflation effects.

Partly this is a timing thing - the hard data isn't going to reflecting the turmoil of the past couple of weeks just yet. There will be a delay between all this chaos and back-tracking and market downturn, and the real economic impacts. The bridge we have to cross that delay is survey data and expectations. Paul Podolsky from Kate Capital notes that the soft data looks bad and the hard data - unemployment - usually (80% of the time) follows.

And indeed expectations of increases in unemployment are rising .

Based on the soft data, you'd say cuts in the second half of the year but the inflationary impact of tariffs and loose expectations limit how many.

In terms of the market outlook, Trump's back-tracking may have avoided the very worst outcomes but the basic picture remains clear: investors are generally scared of holding US assets. US yields and USD are moving in opposite directions. That is not a good sign, even if equities rebounded from their lows post-announcement of the 90 day pause.

Brent Donnelly says wrote a while back that bonds are in limbo. Given recent market moves, limbo might not actually be so bad. The economic arguments for this remain: the economy is looking pretty bad but inflation is set to get a tariff bump on top of pre-existing stickiness. Will higher inflation keep rates high or will an economic/market downturn leads to cuts/bond price rises?

He argues the inflation-sensitive psychology of the US economy will cause the inflationary side of tariffs to outweigh the deflationary-recession side in the near-term, and until this passes yields will remain higher. This seemed like a sensible path through the uncertainty that stagflation brings for rates, and consistent with a Fed that wants to do nothing unless the labour market forces its hand.

Now financial markets have added to this uncertainty, as the Treasury market gets caught between investors seeking to park capital in safe government bonds on the one hand, and anti-US sentiment plus liquidity pressures causing Treasuries to sell off on the other.

Adam Tooze, Katie Martin and Paul Krugman describe the worst-case scenario where the market enters into panic as it deleverages and dashes for cash, with both US equities and bonds selling off. This is where you get into self-fulfilling downward spiral Fed intervention territory - we aren't there yet and Trump's pause has helped but surely this is still in the range of possible outcomes.

This, also from Tooze, is an excellent description of the recent situation and how it maps onto the general blueprint of Treasury market crisis dynamics.

On USD, Donnelly notes the shift in regime from tariffs -> lower trade deficits and higher inflation -> higher rates & USD to tariffs -> chaos, uncertainty and low growth -> overvalued SP500 -> get your money out of the US -> weak USD.

Alfonso Peccatiello makes a similiar point, showing how rare it is for the S&P 500 and USD to weaken together, as they have done recently. Why? Because idiosyncratic US weakness means get your money out of the US, weakening equities and USD. And This is reinforced by more bullish sentiment on Europe and China, as the former unleashes 100s of billions of fiscal spending on defense and the latter shows more signs of needed economic structural reform.

Outlook

I think the question going forward is whether this is a case of the market repricing US growth risks and reacting to Trump chaos vs a more fundamental shift in stance towards the US exceptionalism story. The market can have a long memory - just ask the UK. And governments need to be trusted. Katie Martin again is good on this, highlighting the political risk premium questions that investors now face with the US. So it feels like we need to reach a new equilibrium but it is not yet clear just how far away that is from what we are used to. The market downturn up to a couple of weeks ago felt like the result of a) Trump chaos that was impactful but manageable b) overpriced US equities c) positive narratives in Europe and China mixed with a cloudy economic outlook in the US. It did not feel like the world had turned their back on the fundamental US story & the role of the US and the dollar as a safe-haven. Now we cannot say that with such certainty.

So what do we know? Well, with the current policy environment, not a lot. But I think it is fair to say that the US will not act like an EM (equities, bonds, currency all declining) indefinitely - though how bad does it get before something breaks and the Fed steps in, or Bessent's hand is forced?

And I think those European pension funds are gone and they aren't coming back anytime soon. But I don't think 15 years of post-GFC US exceptionalism gets wiped out permenantly in a matter of days. The 'buy everything US' narrative may have broken this week but the US itself hasn't - yet.