Markets are giving Donald Trump a pass, a thumbs-up, even. His on-off tariff threats against strategic friends and neighbours this week did unsettle stocks and fluff up the dollar, but investors largely held their nerve. Perhaps they are waiting to see if his action matches his words. Much of the alarm had dissipated even before Trump agreed to delays with Mexico and Canada.
This is not the only scene of radical uncertainty that investors are choosing to ignore. At the same time (it has been a long week), a clique of Elon Musk acolytes has been rootling around the arms of government, looking to slash costs, even gaining access to the Treasury department’s core plumbing system. Treasury secretary Scott Bessent has sought to reassure the public this is “not some roving band” and a judge has reined in the system access for the Musk staffers. But while fiscal hawks may cheer the prospect of heavy budget cuts, Democrats in Congress are outraged at the apparent absence of checks, balances and norms. Again, though, the message from markets is: Carry on. We’re cool with this.
Declining to take the president at his word may be good for short-term market stability. But that is not to say it carries no cost. In government bonds, the US wears a shiny shield of exorbitant privilege. Being home to the planet’s dominant reserve currency provides wriggle room around norms that other large economies do not enjoy. This will not evaporate overnight. But shifts in demand for Treasuries since Trump’s re-election in November do show some cracks in the armour. This market has been posing a puzzle for several months. The Federal Reserve has cut interest rates hard since September, but bond prices have continued to fall. As a result, borrowing costs for Uncle Sam and everyone else have stayed elevated. This is quite weird.