If investors are holding on for more gains, it is likely because they now believe that the U.S. Federal Reserve is about to deliver another interest rate cut despite concerns about inflation (currently 2.4%).

Yet the president’s global tariff regime still isn’t in place—and that is generating the kind of uncertainty that investors hate. European Central Bank President Christine Lagarde warned on Monday that inflation would continue to be more volatile and unpredictable precisely because of global supply disruptions.

So why are investors so confident that inflation risk will go away and the Fed will deliver more cheap money later this year? 

Because Fed Chairman Jerome Powell all but said in a couple of recent appearances this week that he is prepared to deliver a rate cut in the fall as long as inflation doesn’t go up.

So, again, why are investors so confident that inflation won’t go up? Because of the TACO trade, the bet that “Trump Always Chickens Out.” 

Although Trump has made big noises about keeping high tariffs on Japan, investors simply don’t believe him. They think, ultimately, that the tariff level is going to fall to the 10% level we have seen in the other deals struck so far.

To be sure, investors do worry about tariff-driven inflation and the economic uncertainty they create: “With respect to the Trump administration’s trade program, businesses noted that tariff uncertainty is causing consumers to hesitate in making commitments, inducing confusion for long-term procurement decisions, and impacting materials pricing,” analysts Lawrence Werther and Brendan Stuart of Daiwa Capital Markets told clients in a note seen by Fortune.

But they also believe that Trump will ultimately cave.

“President Trump has threatened to tax US consumers of Japanese goods more aggressively—but does have a history of not following through on such threats,” UBS’s Paul Donovan told clients in a note this morning. “Japan is very unusual in that its auto sector has absorbed some of the US taxes by lowering export prices (not something other countries, or other Japanese sectors have chosen to do).”

And if Trump gives up, as he often does, inflation won’t show up, or at least not by much. And then the Fed will deliver a rate cut. And that will make the supply of money cheaper. And thus the demand for stocks will be stronger.

Here’s a snapshot of the action prior to the opening in New York:

• S&P 500 futures were flat this morning, premarket.
• The Dow Jones Industrial Average rose 0.91% but the S&P 500 slipped 0.11%.
• Bitcoin rose to above $107K.
• The Nasdaq 100 lost 0.89% yesterday.
• Hong Kong’s Hang Seng was up 0.62% this morning.
• Stoxx Europe 600 was up 0.40% in early trading.
• China’s CSI 300 was flat.
• Japan’s Nikkei 225 was down 0.56%.