GM. This is Milk Road Macro, the newsletter that explains tariffs so clearly, even your group chat’s “economics guy” is out of a job.

Here’s what we got for you today:

• ✍️ What’s going on with tariffs?

• 📊 How is the tariff saga affecting your investment view?

• 🍪 Wall Street banks are raising S&P 500 forecasts

SO, WHAT’S GOING ON WITH TARIFFS?

What in the world is going on with tariffs?

First there were big tariffs.

Then there were smaller tariffs.

Then there were deadlines.

But are there really deadlines?

And now this week, we’ve seen new “tariff letters”.

It’s all very confusing...

So, what’s going on with tariffs and what’s going to happen next?

And what does it all mean for asset markets?

Let’s take a look…

Looking back…

The world was shocked on so-called “Liberation Day” (April 2) when President Trump revealed huge global tariffs.

The White House rolled out hefty new tariffs on imports from more than 60 countries: a flat 10% on everything, along with additional and much higher than expected “reciprocal” rates.

But just days later on April 9, the Trump team suddenly installed a “90 day pause” on reciprocal tariffs - reverting many countries back to just the 10% baseline tariff.

The administration was forced into the major u-turn by the market reaction to Liberation Day.

Stock markets plunged, Treasury yields soared - and there were legitimate concerns for financial stability.

When announcing the tariff change, Trump remarked that bond markets had become “yippy”.

Since the tariff pause, global stock markets have raced higher and bond markets have largely calmed down.

So, where are we going now with tariffs?

This Wednesday (July 9), the 90-day pause on reciprocal tariffs was scheduled to expire.

Meaning, theoretically, any country that had not come to some kind of new trade deal would see tariffs revert back to the very high Liberation Day levels.

The White House’s initial lofty goal of securing “90 deals in 90 days” has been replaced by a much more modest aim of achieving narrower "agreements in principle" with a few key trading partners.

So far, Trump has only struck three trade pacts (not really proper trade deals) - with the UK, China and Vietnam.

This leaves the rest of the global economy - including top US allies such as the EU, Japan and South Korea - in limbo.

However, while everyone was bracing for July 9 to be “the big deadline”, a further deadline extension is now in place.

Treasury Secretary Scott Bessent said last weekend that if trade discussions aren’t “moved along”, tariff levels will “boomerang back to April 2 (Liberation Day) levels” on August 1.

So, effectively a three-week extension to the deadline.

Then this week, Trump officially signed an executive order delaying the reciprocal tariffs for three weeks.

Trump also unveiled a wave of 13 letters threatening trade partners with high tariffs, including Japan, South Korea, South Africa, Indonesia, Thailand and Cambodia.

Trump said that “for the most part” he was content to simply impose the duties, even as he indicated he was continuing negotiations and the new August 1 deadline was “not 100% firm”.

However, this week’s letters appear to be a little bit “performative”, considering that the tariff levels set out in the letters are pretty much equal to, or even less than, the tariffs originally announced on Liberation Day.

So, in essence, the letters don’t really change anything from a tariff rate perspective.

Really, the only thing that has changed is that the deadline has been extended - and now we’ve also learned that a deadline isn’t really a deadline.

What does it all mean for asset markets?

Since the April 9 tariff pause, we have seen a huge sigh of relief from markets.

But it’s possible markets could freak out again if some tariff rates are reinstated to the previously high Liberation Day levels.

Markets are currently pricing in an “effective US tariff level” of roughly 15%.

In a note to clients, Morgan Stanley indicated its base case is that the effective tariff level rises modestly.

Michael Zezas, global head of thematic research at Morgan Stanley, wrote: 

“A more aggressive tariff path would reinforce our economists’ view that risks to the outlook are skewed to the downside – not quite recessionary, but softer versus last year. Tariff relief, conversely, would cut against these key views.”

In a note to clients, Peter Tchir, Head of Macro at Academy Securities, was apprehensive, writing: 

“It makes me very nervous that my social media stream is full of people mocking anyone who is afraid of tariffs. There does seem to be some risk that the administration will decide to take ‘another bite at the apple’ on tariffs. That seems like the biggest risk to the market. That we go back to some policy that employs tariffs at levels that will not be manageable. That risk is increasing as the number of victory laps on tariff policy is growing.”

In my opinion, any potential negative effects on asset markets from changes to tariffs will not be anywhere near as extreme as we saw in April.

This is because, in April, there were serious concerns about US growth, and these concerns were two-pronged: both the impact of tariffs and expected austerity measures from the Government (slashing spending and reducing debt and deficits).

The picture has now changed - with the Trump administration dramatically shifting fiscal policy and attempting to “run it hot” and "grow out of the debt”.

The overall macro backdrop has improved since early April - recession expectations have collapsed.

Also, I believe the Trump administration was privately shocked by the extreme market reaction to Liberation Day and is now scarred by that event.

I think it’s likely they will explore every avenue in an attempt to ensure tariff rates largely do not move back to Liberation Day levels, while still appearing strong to their base.

Which is probably why we now appear to be in a situation where deadlines are being extended and performative letters are being issued.

Financial conditions have eased significantly since early April, with credit spreads, VIX (S&P 500 implied volatility) and MOVE (Treasury bond implied volatility) considerably lower than where they were before, during and after the early April “freak-out”.

These measures barely budged yesterday as the new tariff letters rolled in.

If markets were truly worried about tariffs, these measures would be moving significantly higher.

Interestingly, the S&P 500 has now “caught up” with its performance during the tariff tumult in Trump’s first Presidential term.

Wrapping up

The tariff picture is still very murky.

And it’s unlikely to be fully cleared up in the coming weeks.

While tariffs remain a risk for asset markets, the general macro picture has improved.

In my opinion, any negative market effects from potential tariff changes will probably not have anywhere near the same impact as early April.

That’s it for this edition, catch you for the next one.

POLL OF THE WEEK 📊

Last week, we asked you "President Trump is demanding the Fed slash rates, but what do you think?”

I’ll be honest, we were expecting big support for slashing rates.

But we were surprised by the measured response.

A lot of Milk Road readers think the Fed should cut rates slowly, or just continue to hold steady.

This week we are asking:

BITE-SIZED COOKIES FOR THE ROAD 🍪

Houthi Rebels have attacked two vessels in the Red Sea. The attacks led to a modest rise in the crude oil price.

Apple’s top executive in charge of AI models is leaving for Meta, in another setback for Apple’s struggling AI efforts. Meta offered a package worth tens of millions of dollars to secure distinguished engineer Ruoming Pang. 

Wall Street banks continue to revise S&P 500 outlooks upwards after extremely pessimistic forecasts earlier this year. Goldman Sachs has raised its 3, 6 and 12 month return predictions, citing rate cut expectations and continued large-cap stock strength.

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