And yet, according to Wall Street, none of this should be happening. Investors seem to be ignoring President Trump’s tariff threats—he imposed 30% on Mexico and the EU over the weekend—on the assumption that they will eventually be negotiated away or pushed even further into the future. And, according to JPMorgan, the markets may be making a mistake if they think the Fed will come to their rescue in the event that Trump unexpectedly sticks to his guns.  

Thus the TACO trade (Trump Always Chickens Out) is creating a ton of risk ahead, according to Deutsche Bank.

“Markets are clearly not pricing in these higher tariffs, and we may only know the outcome in the final hours, offering the potential for a sharp market reaction and heightened volatility,” DB’s Henry Allen told clients.

His colleague Jim Reid had much the same take: “To be fair, a month ago Trump threatened the EU with a 50% tariff so you might argue this is an improvement! The market will generally think this is mostly a negotiating tactic and that we’re unlikely to see such rates,” he told clients. “However at some stage, someone’s bluff could be called. Trump is under less pressure to back down with US risk markets around their highs and bond markets relatively stable at the moment. If huge tariffs do get imposed on August 1st, in thin holiday markets, we could get a sizeable market reaction.”

Goldman Sachs is singing from the same hymnbook. “Participants—and our economists—mostly do not expect these tariffs to go into effect. After seeing the pattern several times already this year, markets have likely determined that the rates being floated are too high to sustain,” Kamakshya Trivedi and his team told clients.

Likewise, Paul Donovan at UBS: “Financial markets seem content to assume US President Trump will default to retreating from their latest trade tax threats.”

The markets also seem to be assuming that the U.S. Federal Reserve will bail them out if anything goes wrong with their TACO trade. If the tariffs are inflationary, the Fed will not be able to deliver the cuts to interest rates that the markets are currently assuming are priced-in.

JPMorgan’s Bruce Kasman et al are predicting a “stagflationary tilt” for the second half of the year as the tariffs supply shocks hit the economy. “The disconnect between this forecast and market pricing of substantial gains in corporate earnings and little upward pressure on US inflation is striking,” they told clients over the weekend. 

“Our forecast should also be seen as a challenge to the market’s embrace of a Goldilocks scenario of solid growth and declining US inflation alongside easing Fed over the coming year,” they said.

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

• S&P 500 futures were off 0.3% this morning, premarket. The index itself closed down 0.33% on Friday but remains near its all-time highs. 
• Bitcoin is now above $122K, another all-time high. 
• South Korea’s Kospi was up 0.83% this morning. 
• The Stoxx Europe 600 was down 0.41% in early trading. 
• The UK’s FTSE 100 was up 0.37% in early trading. 
• Hong Kong’s Hang Seng was up 0.26%. 
• Japan’s Nikkei 225 was down 0.28%. 
• China’s CSI 300 Index was flat, remaining above 4,000—near its all-time high.