Trump trade uncertainty returns after Supreme Court ruling

USD: Increased uncertainty a negative for the dollar

The Trump administration has been quick to announce its Plan B following the Supreme Court ruling on Friday that President Trump exceeded his authority in using IEEPA to implement his global reciprocal tariff regime. As expected Section 122 has been used to announced a 15% tariff (10% originally but Trump then increased it) for 150 days in order to protect the US economy from excessive balance of payments deficits. This tariff will now be in place until 24^th July 2026. The Yale Budget Lab estimated that the end to IEEPA tariffs resulted in the overall effective tariff rate falling from 16% (the highest since 1936) to 9.1% before then rising again to 13.7% after President Trump announced the 15% tariff rate under Section 122. Like under IEEPA, goods subject to Section 232 actions and USMCA-compliant goods are exempt from the Section 122 tariffs.  

The UST bond market sold off on the news given the potential that the government will have to repay an estimated USD 170bn already paid by US companies. However, how this unfolds is unclear in terms of the extent of US companies that will pursue getting tariffs already paid reimbursed and in terms of the timing of those repayments. So how impactful this could prove to be on the fiscal policy outlook is unclear and hence we do not expect this to lead to any notable sell-off or steepening of the yield curve. In addition, the fact that the overall effective tariff rate will come down somewhat, means this could have a potential positive impact on the inflation outlook. There is also the prospect of some of the Section 232 tariffs on metals being reduced or removed (steel, aluminium and copper) as had been reported in the media in recent weeks.

The reduction in the overall average effective tariff rate could be viewed as a positive for the US economy as well. However, the increased level of trade policy uncertainty, at least initially, could work to offset that and hence we view the Supreme Court ruling as being mildly dollar negative. We also need to monitor closely the Trump administration’s views on the US dollar. We have assumed that ultimately some of the key members of the Trump administration want a weaker US dollar (Trump himself; Steve Miran & Kevin Hassett) and there is a risk that the administration lean on this more explicitly given the set-back on its reciprocal tariff regime.

In addition, less meaningful tariffs and a reduction in the overall average effective tariff rate could well mean we see some greater downward momentum on inflation. We already expect that the tariff hit was mostly in the CPI data but the ruling could mean we see some renewed downward inflation pressures as the effective tariff rate comes down. That would reinforce the prospects of the Fed delivering the three rate cuts that we expect for 2026. That would add to downward pressure on the dollar given current pricing is well short of three rate cuts being delivered.

PEAK US TARIFF REVENUE LOOKS TO HAVE PASSED

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Yield jump drew foreign investor demand

The JGB market had a volatile January triggered by the decision of PM Takaichi to hold a snap election. JGB investors sold heavily on fears of a successful election result providing the basis for further increases in fiscal spending. The 30-year JGB yield jumped nearly 50bps from the closing level in December to a record closing high of 3.88% before yields then declined. Still, the 30-year still increased by 24bps in January.

What we now know, following the release of the JSDA flow data is that foreign investor demand jumped significantly, likely drawn by the attractive yield on offer. Foreign investors bought JPY 2,175bn worth of super-long JGBs in January, the third largest monthly total. As can be seen in the chart, the foreign investor segment continues to play a key role in containing the move higher in yields and have been steady buyers since the start of 2025. The main sellers of super-long JGBs was Japan’s Life & non-Life insurance companies and to a lesser degree Japan’s regional banks. Lifers have now been heavy sellers for two consecutive months. Foreign investors were not just buyers of super-long JGBs with purchases further up the curve too with total bond purchases in January reaching JPY 6.04trn, just below the record JPY 6.08trn worth of buying back in March 2023.

Judging from price action, domestic buyers may have returned to the market with the government doing a good job in messaging to the market their intention to thread carefully and act responsibly in fiscal policy plans ahead. From that closing high the 30-year yield is now down 54bps easing concerns over financial market instability.

While the flow data indicates still strong appetite for JGBs at these yield levels, risks remain and the IMF last week called on Japan to adopt a credible medium-term fiscal plan. The call was part of the annual Article IV consultation that took place last week. The IMF advised that the policies supporting vulnerable households and companies should be “budget-neutral, targeted and temporary”. No doubt the government will claim that’s exactly what their plans will include, including the suspension of the sales tax on food, which is for two years only. The IMF also called on the BoJ to normalise its policy stance.

That’s becoming much more likely in our view and we see the BoJ hiking at the meeting on 28^th April. Market pricing implies about a 70% probability of a hike then and the increased prospects of a sooner hike have helped stabilise the yen which has been another factor helping bring longer-term yields lower. BoJ board member Takata will speak this week – on Thursday. Takata is one of the more hawkish members of the policy board so will likely endorse market pricing. Deputy Governor Himino’s speech next Monday will be more important.

FOREIGN INVESTOR DEMAND SURGED FOR SUPER-LONG JGBS IN JANUARY

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com