If we believe the narrative emanating from the White House, we might take the recent rally as a sign that the market is all better. Trump has softened his disastrous tariff rhetoric and is listening to his better angels (or at least the billionaires who got him reelected.) So is the coast actually clear?

It’s obviously a scary time to go long, given that the past several weeks are peppered with large drops. It’s also nerve-wracking to go long on the basis of a rally that’s the result of Trump’s offhand comments that he doesn’t plan to fire Jay Powell and that he will be very nice in his trade negotiations with China. Naturally, the rally began during the low-volume after hours when surprises can have much greater effect.

Can we really trust those comments or will Trump consider today’s market rally “money in the bank” for use in making questionable future policy decisions? Tariffs are obviously inflationary, but we won’t get inflation data that reflects the tariffs (announced Apr 2, after Q1 was over) until PCE on April 30 and CPI on May 13. Aside from employment and consumer confidence, we won’t get any significant April economic data until Apr 30.

The market’s 21.8% decline between Feb 19 and Apr 7 obviously earned Trump a great deal of criticism. The subsequent bounce might help his approval numbers, but it won’t necessarily heal relationships with our trading partners, restore the confidence of corporate CEO’s in terms of hiring and capital expenditures, or encourage foreign investors to buy US debt.

The highly unusual divergence between treasury yields and the US dollar is almost certainly due to the world losing its appetite for US-based assets due to high tariff rates – as well as the US stepping back from its military, economic and humanitarian leadership role. I question whether Trump squirting a little water on the fire that he started will restore the status quo.

The disruption in the bond market has caused a significant steepening of the yield curve, with the 2s10s breaking out and topping 60 bps on Tuesday. In my modeling, a breakout such as this following an inversion has always resulted in an equity selloff greater than the one we’ve already experienced. The 2000-2003 and 2007-2009 crashes are prime examples.These crashes were caused by a variety of economic circumstances in environments of overpriced equities. There’s an argument to be made that this time is different since it’s a self-inflicted wound (aka stagflation) that can be healed with a properly crafted tweet. But, it’s quite possible that the knock-on effects from Trump’s tariff policy – even if it’s modified to less drastic terms –  could usher in a full on recession that can’t be tweeted away.

Since the FOMC would be caught between a recessionary rock and an inflationary hard place, there is little chance that they would be able or willing to swoop in and rescue markets with an infusion of liquidity and/or massive rate cut. Could this be one of those situations where the market will need to experience a much bigger drop in order to reach a state of equilibrium?

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It was the market, again. This time, as the last, Trump made a seemingly offhand comment which was designed to put out the fire that he started. It was done in the low volume after-hours, when the impact would be greatest. And, it forced a great many offside traders to cover their shorts.

Like last time, it leaves markets teetering between a recovery on the one hand and a bear market bounce on the other. The deciding factor is likely to be whether Trump can ignore his nature and stick to the script.

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The 2s10s is still broken out. The 10Y is still broken out. The USD is still under pressure. Yet futures are up 50 points. At least one of these things is wrong.

Thankfully, chart patterns offer a hint.

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While tech troubles are serious enough, the bond market is being rattled by Trump’s escalating attacks on Fed Chair Jay Powell. Kevin Hassett confirmed that Trump is actively seeking ways to fire Powell ahead of the end of his term in May 2026.

The 10Y is testing its 100-day moving average again, sending the 2s10s to 60 bps – a clear break out in every respect. This is a very tough scenario for equities and could easily result in lower lows.

Higher yields, in combination with a weaker US dollar, support the observation that Trump’s trade war and policies are leading investors to shun the greenback and US treasuries.

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ES is up slightly while DJIA futures are down over 500 points on the meltdown in UNH.Meanwhile, Trump — who appointed Jay Powell in 2017 — is calling for Powell to be terminated.

“Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete ‘mess!’ Trump wrote. “Powell’s termination cannot come fast enough!”

It’s surprising that it took this long, as lower interest rates would mitigate at least some of the damage that Trump’s tariffs have done to the market. As is obvious to anyone who has ever taken Econ 101, lower interest rates would also risk even higher inflation than Trump’s tariffs will cause.

So the Fed is caught between a rock and a stagflationary place. They can deal with rising inflation or with a slowing economy. Whichever they choose, the other is likely to suffer.

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Mortgage applications fell short, but retail sales beat and industrial production slumped. All in all, a mixed bag that supports the stagflation narrative. The algos aren’t happy.

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Futures are flat after stocks again failed to build on last week’s overdone rally. And, don’t look now, but SPX’s death cross finally occurred yesterday.

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In the face of confusing but potentially beneficial changes to Trump’s tariff policies, futures have continued melting up. No doubt, there is plenty of short covering. The other factor, of course, is the effect that a 15% crash in VIX is having on algos.

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Don’t look now, but DXY has almost fallen to our 98.976 target from last year. The culprits are numerous, led by the euro and yen which are both soaring relative to the greenback. The EURUSD has broken out and has nearly reached our 1.15 target.

These moves represent a very serious development for US markets, as the targets were initially established as part of a worst case scenario in 2024 and are exacerbated by a breakout in the 10Y yield.

The breakout in the 10Y is contrary to (temporarily) tame inflation and, as we have discussed, is consistent with a rejection of the USD and of Treasuries at a time when they would normally be buoyed by a flight to safety.

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It was Mar 23, 2020. The COVID pandemic had scared the crap out of markets. The S&P 500 had dropped 35% in about a month and, to make things worse, a dreaded death cross was only 50 points away.

Death crosses, where the 50-day moving average drops below the 200-day, are well known to investors – technicians or not.They often usher in dramatically lower prices such as in 2007-2009 when SPX shed 54%.

On Mar 23, 2020, SPX’s approaching death cross promised to add to the pain already experienced by markets roiled by the pandemic. The Trump administration, which had badly fumbled its public health response with such brilliant advice as injecting bleach, was paying much more attention to the stock market than the health crisis.

Congress and the Fed sat on their hands as Trump press conferences and tweets were increasingly frantic. Finally, with the Dow back to the lows last experienced on election night 2016, the market bottomed in response to a concerted effort to prop up stocks.

It started in the after-hours on a Sunday night with a press release by Treasury secretary Mnuchin that promised $4 trillion in financial stimulus. The Dow gapped higher, closing +13.4% off its Friday lows. The S&P 500 gained almost 12%.

By the time the death cross occurred on the 27th, SPX had rebounded a stunning 20%. It was a remarkable rally that any active investor will remember well. Many of us were reminded of it yesterday when the S&P 500, which had already dropped more than 20% from recent highs (the definition of a bear market) was so close to completing another death cross.

I imagine there were very few active investors who weren’t thinking about the death cross, with many of them recalling the 2020 incident and some of us anticipating a repeat. As we wrote yesterday:

Note that SPX/SPY are about to experience a death cross – where the SMA50 drops below the SMA200. In a manipulated stock market such as we have, this is often a point at which the manipulators jump in to avoid the downside such a move entails.

It came as little surprise yesterday when Trump announced that he was going to pause some of the tariffs which had set the financial world on fire last week. Oh, and it would be nice if investors would thank him for putting out the fire that he set.

Only, the fire isn’t out. Despite March’s rather tame CPI print released this morning, the tariffs still in place will undoubtedly increase inflation. Despite the phalanx of foreign trade representatives supposedly lining up to kiss Trump’s ass, the average effective US tariff rate is still over 25%.

As we’ve pointed out many times, tariffs are a tax on the American people. They are also regressive, affecting lower income Americans more than the wealthy Americans who will benefit most from the $2 trillion in tax cuts theoretically financed by tariff income (with assistance from $880 billion in Medicaid cuts.)

It’s such an outrageous “steal from the poor and give to the rich” scheme that Republicans can’t figure out how to sell it to their constituents who are increasingly alarmed.  Give the American people credit for recognizing the coming wave of inflation (and bothering to read their 401(k) statements.)

Speaking of which, it seems at least a few investors have noticed that the tariff fire is still smoldering. Futures are off almost 2%.

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