The wheels are coming off. Trump has nuked the business cycle with his global tariffs plan, and with the initial response from China and other major counterparts being retaliatory, the market continues to tank. Vietnam and Cambodia have been the first countries to capitulate in an attempt to strike a deal with the US, and that’s the kind of positive feedback loop needed to turn the tide—a race to the tariffs bottom among manufacturing hubs. But Vietnam is not China, and China did the exact opposite by slapping a 34% tariff on US goods effective April 10. My impression is that the EU will also retaliate rather than suggest lowering tariffs.

The real economy was still holding up in March, as evidenced by the labor market report. However, with virtually every commodity market now in free fall, we are increasingly convinced that global growth is deteriorating at a pace reminiscent of the March 2020 lockdowns.

Even though the tariff-induced inflation might tempt the Fed to hesitate, we are nearing a point where the meltdown in growth will shift their focus back to rescuing the labor market. In the past few hours, the USD has caught a bid again—typically what you see in the early innings of a liquidity event that could force the Fed into action. I think it is likely we’ll see the Fed called to act no later than the May meeting.

Powell said the Fed is “WELL-POSITIONED TO WAIT TO CONSIDER ADJUSTMENTS,” which may become his “we are not here to close spreads” moment—reminiscent of Lagarde’s infamous u-turn in March 2020. That sentence may turn out to be the worst thing he could’ve said. We’ll likely need to see some real pain before things get better, as the Fed will ultimately be forced to step in.

Chart 1: The labour market looks destined for lay-offs