Tariffs and the global trade war could flip the macro inflationary (stagflationary) sooner than expected

“It’s complicated.”

An answer that may be given by people when asked about their relationship, about other aspects of their life or in this case, about the inflation/deflation dynamics in play amid tariffs and the global trade war.

“A Spanner in the works.”

A condition where a figurative wrench has been thrown into the workings of an otherwise normally functioning machine or system.

Tariffs and the global trade war are that Spanner, or Monkey wrench, if you will. I am compelled to evaluate whether I am wrong in expecting the ongoing economic troubles to resolve deflationary before morphing inflationary/stagflationary.

Despite Trump’s haranguing and threatening Jerome Powell, the Fed chief is not going to lower interest rates with the bond market telling him to do the opposite, or to at least hold the line. The 30 year Treasury bond yield has taken on a more bullish look of late as it gently trends upward after barely holding a higher low to the December low.

It’s always a good time, IMO, to look at the long-term “Continuum” view of the long bond’s yield.

It’s a new macro, after all. That new macro is one of breakaway inflation signaling. My interpretation is and has been that the trend break in decades-long disinflationary bond market signaling put handcuffs on monetary policymakers (the Fed). In other words, their efficacy in bailing out markets and the economy will be greatly reduced because the bond market no longer presents the illusion of “no inflation problem”.

With nominal long-term Treasury yields rising in response to the would-be inflationary pressures of the trade war, the 10-2yr Yield Curve steepener is now indicated to be happening under inflationary pressure.

As a reminder, Yield Curves can steepen under inflationary or deflationary pressure, with the difference being a different flavor of economic pain to be served up. Reference 2007, which was an inflationary steepener before it morphed deflationary and crashed the macro in Q4, 2008.

Here is the curve steepener in real time today.

Against this situation let’s consider that Trump is looking into firing the Fed head.

“The Fed really owes it to the American people to get interest rates down. That’s the only thing he’s good for,” Trump said. “I am not happy with him. If I want him out of there he’ll be out real fast believe me.”

The problem is, Mr. President, that the Fed does not control the bond market. At least not to the degree that it used to be able to manipulate the bond market during the Continuum’s downtrend. Trump is beating up Powell for something that he, Trump, himself instigated through the unleashing a rapid string of head spinning tariffs, seemingly without much forethought. Of course, China and others have responded. It’s a mess. The bond market does not like messes.

It’s a scary situation and with nominal long-term yields rising the Yield Curve steepening further toward its implication of an economic bust, the chances are increasing that said bust will be Stagflationary. I have been thinking deflation first, possibly brought on by Spanners and Monkeys in the works of global trade. But the bond market is begging consideration of the other way around.

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