"90 Trade Deals Promised, 2 Delivered: Markets Stop Believing the Hype"

KR Opinion

As we approach the July 9th trade deal deadline, we suddenly find ourselves facing another postponement to August 1st, continuing a frustrating pattern that has plagued the administration since the announcement of liberation day. The messaging and tactics surrounding these trade negotiations appear increasingly erratic and unpredictable, lacking any coherent strategy or clear direction.

Each successive policy change and deadline extension appears to follow the economic principle of diminishing marginal returns in terms of market reactions. In the early days of these announcements, we witnessed dramatic market responses with significant volatility and sharp movements. Now, however, the markets have grown increasingly desensitized to these constant shifts and delays. The repeated pattern of promises followed by postponements has created a sense of numbness among investors, who no longer react with the same intensity they displayed over the past several months.

The 25% duties on goods from Japan and South Korea remain a major obstacle in trade relations. These two countries are America's second and third-largest trading partners in Asia, making these tariffs especially impactful on the broader economy. Additional letters outlining tariff policies are expected to be sent to other countries this week, ensuring that trade tensions will continue to dominate financial headlines and market discussions in the near future.

This ongoing sense of déjà vu regarding trade negotiations has led to the subdued market movements we're currently seeing. Scott Bassett recently stated that over the next four days, we can expect three or four major deals to be announced. Given the current diplomatic activity, I think we might see progress involving India and possibly other Asian countries coming to the negotiation table.

Meanwhile, the European Union seems to be making progress toward reaching a deal by Wednesday. This follows positive statements from the European Commission president, who said she had productive talks with Trump. However, when we look at the administration's actual track record since April, the results are much less impressive than the rhetoric suggests. They have only managed to produce two agreements that can hardly be called trade deals—thinly outlined arrangements with Britain and Vietnam, along with what amounts to a fragile trade truce with China. This falls far short of the 90 deals that were promised, damaging credibility and prompting markets to reconsider their expectations.

Markets are increasingly convinced that the administration cannot secure meaningful trade deals. I've repeatedly argued that the UK arrangement isn't a genuine trade deal in any substantial sense, and the same criticism applies to the Vietnam agreement. We're simply not seeing the type of comprehensive, substantive trade agreements that would justify the high level of confidence the administration is projecting.

As markets adjust to this new reality, we're observing a growing complacency regarding trade issues. This explains the muted responses to recent announcements, including minimal reaction to what was touted as the "beautiful big bill." The lack of market movement suggests investors have largely priced in the likelihood of continued disappointment on the trade front.

I recently came across news that Goldman Sachs is raising their 6 and 12-month return forecasts for the S&P 500. This development actually makes me quite nervous, as these analysts have a track record of being wrong at crucial turning points. Their optimistic revision reinforces my expectations that markets will experience a pullback and that we'll see economic weakness emerge in the third and fourth quarters.

While I realize I'm starting to sound like a broken record on this topic, I continue to see significant potential for this bearish scenario to happen. My original thesis focused on the possibility of a full recession. Now, the more likely outcome appears to be an economic flattening or slowdown, although a recession remains a real possibility. Currently, I assign a 40% chance to a recession scenario and a 60-70% chance that markets will flatten while the economy dips moderately. Whether this weakness results in negative GDP growth remains to be seen, but increasing evidence suggests economic challenges are likely to emerge in the coming months.

Economic Releases for the Week of July 07 - 11

Jul 08

• 06:00 ET: NFIB Small Business Optimism For: Jun | Trading Impact: Low | KR Forecast: NA | KR Cons: NA | Prior: 98.8

• 15:00 ET: Consumer Credit For: May | Trading Impact: Low | KR Forecast: $8.6B | KR Cons: $12.2B | Prior: $17.9B

Jul 09

• 07:00 ET: MBA Mortgage Applications Index For: 07/05 | Trading Impact: Low | KR Forecast: NA | KR Cons: NA | Prior: 2.7%

• 10:00 ET: Wholesale Inventories For: May | Trading Impact: Low | KR Forecast: 0.0% | KR Cons: -0.3% | Prior: 0.2%

• 10:30 ET: EIA Crude Oil Inventories For: 07/05 | Trading Impact: High | KR Forecast: NA | KR Cons: NA | Prior: +3.845M

Jul 10

• 08:30 ET: Initial Claims For: 07/05 | Trading Impact: High | KR Forecast: 242K | KR Cons: 245K | Prior: 233K

• 08:30 ET: Continuing Claims For: 06/28 | Trading Impact: High | KR Forecast: NA | KR Cons: NA | Prior: 1964K

• 10:30 ET: EIA Natural Gas Inventories For: 07/05 | Trading Impact: Low | KR Forecast: NA | KR Cons: NA | Prior: +55 bcf

Jul 11

• 14:00 ET: Treasury Budget For: Jun | Trading Impact: Medium | KR Forecast: -$225.0B | KR Cons: -$257.5B | Prior: -$316.0B