Here’s what’s more important than the tariff announcement

Mid-week market update: The market approached Trump’s “Liberation Day” tariff announcement all beared up. Trading desk surveys indicate that most retail and institutional market participants had reduced risk coming into the announcement, with outright bears outnumbering the buy-the-dip crowd by 7%.

While the ultimate outcome of the Trump tariffs will move markets, there’s something even more important than the announcement.

Traders need to keep in mind that sentiment is a condition indicator and not an actionable trading indicator.  Nevertheless, sentiment coming into “Liberation Day” is showing an extreme level of fear. Such sentiment backdrops can resolve in a “buy the news” relief reaction.

 

Similarly, Ryan Detrick pointed out that CTAs are in a crowded short in equity futures. Even the hint of less bad news would be enough to set off a short-covering stampede.

 

Coming into the announcement, the consensus bear case has coalesced around the scenario of an immediate implementation of a uniform 20% across-the-board tariff rate. The bull view would see a more targeted rate of 12% to 20%, along with a delayed implementation schedule. Treasury Secretary Scott Bessent offered some relief when he pre-announced that the stated tariff rate will be a ceiling from which individual rates could come down.

Ahead of the official announcement, UK’s Sky News provided support for the bull case. It reported that the U.S. will impose tariffs by country and industry in separate bands. By inference, such a complicated scheme implies a delayed implementation time frame, as the Commerce Department does not have the capacity to impose import duties on a vast array of products and from different countries of origin with immediate effect.

As the market waits for the official announcement at 1600 ET, which is the close of the market, the trade factor response edged up, indicating rising anxiety, even though the S&P 500 staged a minor rally.

Even as tariff fears grip Wall Street, the next frontier for the stock market outlook will be the level of convergence between deteriorating soft data and the still resilient hard data.

Commentary from respondents of the ISM survey, which represents soft expectations data, shows a high level of anxiety.

 

A similar level of uncertainty vibe can be found in the Dallas Fed’s Texas Service Sector Outlook Survey.

 

On the other hand, the hard data has been resilient. The Economic Surprise Index, which measures whether economic data is beat or missing expectations, is recovering after dipping below zero. Better macro data would put upward pressure on the 10-year Treasury yield as the two series have shown some correlation in the past.

The next major test for hard data is the March Payroll Report due Friday morning.

Coming into the report, there are numerous signs of labour market weakness. The Conference Board consumer confidence survey shows that the percentage of respondents who expect fewer jobs in six months have spiked to recessionary levels.

 

Layoff announcements are also rising sharply.

 

On the other hand, the ADP report this morning beat market expectations and it shows improvements in private payrolls across all firm sizes.

 

Stay tuned. Will good (job) news be good (stock) market news? The hard-soft data tussle is the next battle of bulls and bears.

My inner trader is long the S&P 500 and positioned for a “buy the news” event. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

Disclosure: Long SPXL