The Boy Who Cried Tariff: Markets Yawn, Inflation Looms
The View: Markets on Autopilot as Trump Flies the Tariff Loop Again
Markets are treating Trump’s latest tariff barrage like the boy who cried “import tax”—a familiar growl that rarely bites right away. The president’s threat to impose up to 100% tariffs on Russia within 50 days, paired with a fresh 30% squeeze on the EU and Mexico, would normally ignite a cross-asset risk-off storm. But instead, Wall Street barely blinked. The Nasdaq casually notched a record, and the S&P inched higher.
The market’s reaction isn’t indifference—it’s muscle memory. Traders have seen this theatre before. They’re conditioned to view Trump’s tariff threats as opening bids, not final acts. That sentiment is grounded in history: the 2018 tariff cycle initially rattled nerves, but ultimately, equities powered through as the policy impact proved more bark than bite. Once again, investors are pricing in a tariff ceiling that feels survivable—roughly 15% effective by year-end, according to survey consensus—buffered by the assumption that exporters and U.S. corporates will absorb a significant share of the cost.
This week’s CPI report, due later on Tuesday's New York session, is where rhetoric starts meeting receipts. Inflation, for now, has remained tame, but June is when the rubber starts to meet the road. Much of the earlier tariff impact was delayed by “on the water” exemptions and pre-emptive stockpiling. But that frontloaded cushion has worn thin. Goods slapped with April duties are now clearing customs. What we’re about to see in the CPI is the first real read on whether the price hit is getting absorbed and merely trickling through the supply chain or dumping straight onto the consumer’s lap.
Treasury yields nudged higher ahead of the print, suggesting mild nerves in fixed income—but nothing dramatic. It’s still a glidepath environment, with a September Fed cut seen as base case unless CPI surprises to the upside. The equity tape tells a similar story. Even with a raft of earnings due this week—from the banks to Netflix to Pepsi—the market’s posture is relaxed, almost sunbathing in the tariff heat. Traders are betting that price spikes will be modest, Fed-friendly, and slow-burning enough not to derail the rally.
But that comfort could be overstated. Inflation doesn’t knock on the front door—it creeps in through the kitchen, the gas pump, and the Amazon checkout screen. The lag between tariff implementation and CPI reaction is real, but it’s finite. By the time July rolls in, the data will get noisier, and the Fed’s room to maneuver may narrow. If Tuesday’s CPI print runs hot, rate cut expectations could get clipped—and the “tariff shrug” trade may finally start to itch.
For now, however, the complacency trade is winning. Investors are still buying the dip on tariff talk, wagering that this is all just another round of leverage politics. But like any poker game, it’s not the cards on the table that matter—it’s the next turn. And the next turn is consumer inflation.
The View: Markets on Autopilot as Trump Flies the Tariff Loop Again
This market behaves less like a poker player and more like a seasoned airline pilot navigating turbulent skies—not because the ride is smooth, but because the instruments say the engines are fine. Traders have flown through this storm before: tariff threats on radar, panicked passengers in the back, and still, the plane climbs. 2018 was the dress rehearsal; 2025 feels like the encore, only this time the cockpit is equipped with better earnings, a stronger tech tailwind, and a co-pilot named fiscal expansion.
Saturday’s tariff salvo on the EU and Mexico barely caused more than a mild downdraft in futures. Risk assets may have opened the week in a shallow descent, but unless the turbulence becomes structural—hitting profits, confidence, or demand—equity markets are unlikely to divert course. Traders are betting that these clouds will dissipate, just as they did the last time Trump took the world on a tariff joyride.
There are clear parallels. Back then, Trump’s trade tantrums with China created brief squalls, but markets recovered quickly once delays and deals came into view. Today’s version may have grander ambitions—rewriting the rules of global trade—but the rhythm is familiar: announce, escalate, retreat. Markets are conditioned to this cycle, and so far, the autopilot remains engaged.
The real difference lies in the fuel mix. In 2018, the Fed was draining liquidity while fiscal tailwinds were already fading. Today, rate cuts remain on the table, and the recent budget package has poured fresh kerosene into corporate profitability. The AI boom, in particular, has added jet engines to earnings forecasts, giving investors more altitude to work with. A 5.5% S&P 500 gain in 1H25 isn’t just momentum—it’s ballast.
That said, no flight is without risk. The bond market is beginning to flash warning lights. Long-end yields are creeping up, not necessarily because of tariffs themselves, but due to mounting fiscal concerns. If borrowing costs spike and the Treasury's appetite for debt issuance overwhelms demand, we could hit a macro air pocket that even strong earnings can’t offset.
So far, though, history is on the bulls’ side. In both 2018 and 2025, equities shrugged off trade tensions until tariffs were actually felt in the earnings cabin. Until that happens, the logic remains: ride the jet stream, brace for headline chop, and watch the gauges. But traders should keep their seatbelts fastened—Trump’s brand of economic turbulence often looks benign until it isn’t.
Yen Adrift as Tokyo Braces for a Political Typhoon
The yen, once the market’s flight-to-quality north star, is now trading more like a ship without a captain—adrift in a sea of political crosscurrents and shifting trade winds. What started as a technical pullback has morphed into a broader sentiment reversal, as traders step away from long JPY exposure not in panic, but with the tired resignation of a veteran who’s seen this movie before.
At the heart of this unwind is Tokyo’s increasingly fraught political gamble. The Ishiba government is playing tariff chicken with Washington, demanding a sector carve-out for autos before advancing any broader trade framework. On paper, it's a defensive stance meant to preserve Japan’s manufacturing core. In practice, it’s a bluff being called by a U.S. administration that’s already struck deals elsewhere—and has no political incentive to budge.
And now, with the July 20 Upper House election in sight, the FX market is starting to price in the risk that Japan may not even have a coherent negotiating partner in a week’s time. The LDP-New Komeito coalition is skating dangerously close to losing its grip on the Upper House. The Lower House majority, already wobbly, could become irrelevant if the government loses legislative momentum. The yen isn’t just reacting to the absence of policy clarity—it’s starting to discount the absence of a government entirely.
There’s blood in the water in Tokyo’s single-seat districts. Historically LDP strongholds are flipping in poll after poll, and if the coalition fails to hit the 50-seat threshold, Ishiba’s premiership may be mortally wounded. There's no formal resignation trigger, but markets know how Japanese politics work: a wounded PM without parliamentary force is little more than a caretaker waiting for the curtain to fall.
Enter Sanae Takaichi—a hawkish nationalist with deep Abenomics credentials and a dovish tilt on monetary policy. Should she rise to the top job, it would signal a return to policy orthodoxy that’s yen-negative by design: think deeper easing, less fiscal restraint, and looser lips about currency intervention. It would be a market signal as loud as any BoJ press conference: sell rallies in yen strength and brace for a return to reflationist positioning.
Traders are already hedging that outcome. The political risk premium is creeping into JPY pricing ahead of any CPI print or Fed remark. Even with U.S. inflation and Powell’s posture in play, it's the domestic election calendar that now owns the JPY narrative. It’s the kind of dynamic where the tail (politics) wags the dog (FX), and the currency becomes a referendum not on macro fundamentals, but on coalition math.
There’s no smooth sailing here. If the LDP holds the line, USD/JPY could retrace sharply lower as fears subside, trade optimism returns, and Japan’s political center regains gravity. But if the coalition fractures, and Takaichi or another wildcard enters the frame, expect a re-rating lower for the yen.
It’s not just a yen trade anymore. It’s a Tokyo tape bomb. Every tick in USD/JPY this week is a running odds board on Japan’s ability to govern itself.