Markets may have had too many TACOs

In the face of repeated threats by the U.S. to impose punishing tariffs on trading partners, and repeated climbdowns, investors may have become too skeptical of these threats — a complacency that could be raising the risk of actual negative trade action, Desjardins Group suggests.

In a new report, economists at Desjardins note that, unlike earlier in the year when markets plunged in response to U.S. President Trump threatening high, sweeping tariffs, his latest threats — promising large tariffs on major economies including Europe, Japan, Canada and Mexico starting Aug. 1 — have produced little market reaction.

In fact, equity markets are near all-time highs and bond markets haven’t flinched either, despite both renewed tariff threats and the prospect of rising U.S. debt following the passage of its budget bill.

The lack of response suggests the market doesn’t see these latest threats as credible — reinforcing the TACO (Trump always chickens out) trade thesis.

“This raises a key question: are markets placing too much confidence in the TACO trade — the assumption that Trump will ultimately tone down the rhetoric before it inflicts real damage?” Desjardins analysts wonder.

“The irony is hard to ignore: stable financial markets may be encouraging Trump to up the ante. Investor complacency may have created a potentially precarious moment,” they warn in the report.

Desjardins said its “best guess” is that the U.S. will ultimately settle on tariffs on key trading partners that are in the 10% to 20% range, “allowing global trade to adjust without major disruption…”

In the meantime, the world’s major central banks are in “wait-and-see mode” too, it said.

“Should tariffs exceed market expectations or uncertainty persist beyond Aug. 1, pressure will mount” on the central banks in Canada, Europe, the U.K. and Australia to ease policy, it suggested.

In the U.S., Federal Reserve Board head Jerome Powell has signalled that rates are holding steady for now, “pending clarity on the inflationary impact of tariffs.”

“However, President Trump continues to push for lower rates and has openly pressured Powell to resign, adding a layer of political risk to the Fed’s policy outlook,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.