The market is overlooking the most-important news of the day

Given all the tariff uncertainty, I feel the need to highlight the first section of the United States constitution:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts
and Excises, to pay the Debts and provide for the common Defence and
general Welfare of the United States

In all of Trump’s bluster about tariffs (AKA duties), this has been forgotten.

Today, we got a House budget write up that talks about paying for an extension of the 2017 Trump tax cut. There’s one thing it doesn’t include on the revenue side: New tariffs — it doesn’t even mention tariffs.

Also today, Republican Senator Mitch McConnell released an op-ed with an unconditional opposition to tariffs, particularly on allies. That follows similar comments from two other Republican Senators — Rand Paul and Susan Collins.

The message: Tariffs are D.O.A. in Congress.

Now Trump has some ability to unilaterally apply tariffs like the Section 232 tariffs on steel and aluminum or Section 301 but those required a long process (minumum 4-5 months, in practice often a year) that he would have to go through for other industries. There is some power under the emergency options that he’s threatened Canada and Mexico with but using those on allies with Congressionally-approved trade deals is highly dubious and very likely wouldn’t survive a court challenge.

There is certainly some grey area here but the House budget today and op-ed from McConnell show he would also face a fight against his own party in Congress.

The market is slowly figuring out there won’t be a trade war, at least not with allies (China is another story). That’s an opportunity because all the bluster creates opportunities to fade them in markets.

My belief that Trump is trying for an earlier renegotiation of USMCA via tariff threats is continuing to be strengthened. His bluff was called in the first round and now he’s gone back to aluminum and steel tariffs. It’s unclear if Mexico and Canada will blink.

On Europe, he also appears to be looking to negotiate rather than implement tariffs.

Now it’s tough to say exactly what’s priced in and how much is political (rather than market) angst. The Mexican peso, for instance, has largely taken the election of Trump and the tariff talk in stride.

There is a feeling in markets and the world right now that ‘Trump can get away with whatever he wants’. I think that’s more driven by fear than rational thinking. Congressional Republicans aren’t about to give up power to Trump or anyone else.

To wrap up: Tariffs are still a risk. Congress will negotiate over tax cuts, tariffs and everything else. If McConnell has to choose between avoiding tariffs and extending the Trump tax cuts, I suspect he takes the tax cuts every time. But every passing day I see a smaller probability of a trade war.

Today we’re likely going to face another challenge, with Trump announcing something on reciprocal tariffs. So far the trade on every tariff announcement has been to fade it. Will it be again?

This article was written by Adam Button at www.forexlive.com.