The Game that Determines the Global Market: Trump vs. Powell, Let's See Who Backs Down First!

The US stock market has fallen into a "coward" game, with Trump and the Federal Reserve competing to see who backs down first.

Under the repeated "tugging" of Trump's tariff policy, the US stock market experienced a "roller coaster" ride overnight, with all three major US stock indices hitting six-month lows. Unlike his first term, Trump currently shows no signs of "market rescue," and the strike price of "Trump put options" seems to be "bottomless."

The market is currently hoping that the Federal Reserve will "blink first" and cut interest rates to rescue the market, which is why front-end rates are rising even as the stock market sells off. However, Bank of America analysts warn that the Fed's primary goal remains inflation. If there are clear signals of recession, the Fed will certainly cut rates quickly. But if economic growth slows to below trend levels (but still positive) and inflation is above target, cutting rates may send the wrong signal externally.

The strike price of "Trump put options" seems to be "bottomless"

After a significant drop on Monday, Trump appears to be "unmoved" in soothing the market. In response to Ontario's 25% surcharge on electricity exports to the US, Trump directly announced on Tuesday that he would double the tariffs on Canadian steel and aluminum to 50%. This directly triggered a plunge in US stocks during trading.

In an interview at the close, Trump was indifferent to the market's sharp decline, stating that the sell-off had nothing to do with him, and that the market goes up and down; egg and gasoline prices have fallen, and the US economy will not enter a recession, with the economy set to "surprise" people. This directly led to US stocks giving back some of their early gains.

The macro narrative that "the US needs a recession" seems to be starting to dominate the market. Compared to Trump 1.0, Trump 2.0 is playing out a completely opposite script. The market is beginning to realize that causing a recession in the US is something Trump must do.

Under pessimistic market expectations, Goldman Sachs has also lowered its economic outlook for the US. Analysts emphasize that the downgrade is not due to recent data (which is quite good), but rather because the assumptions regarding trade policy have become more unfavorable, and the US government is managing expectations of recent economic weakness caused by tariffs (promoting the possibility of a recession).

Trump vs. Powell, let's see who blinks first

Previously, investors generally expected that during a pullback in the US stock market, both the Trump administration and the Federal Reserve would provide support to varying degrees, namely the "Trump put" and the "Fed put." The current common view is that if the Trump administration is unwilling to support the market, the Federal Reserve will intervene, which is why front-end rates are rising even as the stock market is selling off.

Some analysts describe this as a "chicken game," in which the Federal Reserve will "blink first": due to concerns about the downside risks to the labor market and consumer spending, the Federal Reserve will be forced to support risk assets by cutting interest rates.

However, Bank of America analysts warned in a report on March 11 that this optimistic expectation overlooks two important nuances.

First, the recent slowdown in data is partly due to concerns about inflation. After an unexpected rise in inflation recently, if tonight's February Consumer Price Index (CPI) report exceeds expectations again, it will increase the risk of inflation staying above the target.

In a stagflation scenario, the path from economic activity slowdown to interest rate cuts is not a straight line. If inflation remains moderate, investors will have to continue to watch whether the downside risks to economic growth will materialize.

Second, the interaction between the Federal Reserve and the government is a "repeated game." From a game theory perspective, credibility is important. If there are clear signs of recession, the Federal Reserve will certainly cut rates quickly. The more difficult situation is when economic growth slows to below trend levels (but still positive growth) while inflation is above target. Cutting rates may convey the message that the Federal Reserve does not care about the inflation target.

Huatai Securities stated that, for now, inflation readings remain high + facing tariff risks + economic data has not materially weakened, making it difficult for the Federal Reserve to make a significant shift in the short term. Trump publicly claims to "not care about the stock market," but his business mindset remains his "baseline." Treasury Secretary Mnuchin is well-versed in market logic, and after a significant adjustment in U.S. stocks, it cannot be ruled out that there will be some easing in policies such as tariffs to soothe market sentiment.

If the U.S. goes into recession, the whole world will be dragged down

Nomura analyst Charlie McElligott stated that the U.S. economy is experiencing a man-made recession, and the issue lies in the time lag between the "pain" required in the first phase (the "withdrawal period" as Mnuchin calls it, or the "transition period" as Trump refers to it) and the "benefits" brought to the market in the second phase (mass deregulation, tax cuts, lowering interest rates/Federal Reserve rate cuts).

The ultimate outcome depends on whether the Trump administration can quickly trigger a deflationary shock through "controlled demolition," which brings a dual blow of slowing economic growth and creating negative wealth effects, thereby creating conditions for future economic stimulus measures. If this process is not fast enough, the market may adjust itself, finding a "clearing level," at which point the so-called "Trump put option" will become worthless.

To regain market confidence in the future, the Trump administration needs to find a way to shorten the timeline and bring forward the "benefits" of the second phase, shifting negative sentiment from the current difficulties to the support needed by the private sector to help address these challenges. However, achieving this will face enormous challenges, especially in garnering enough support to pass continuing resolution bills (to ensure government operations) and subsequently completing budget reconciliation, which will be a daunting struggle Moreover, the scope of this "man-made recession" is also uncontrollable.

Former JP Morgan Chief U.S. Equity Strategist Marko Kolanovic warned, if the risk of a U.S. economic recession is rising, then the risk of a global economic recession is also rising. Everything else is wishful thinking. Trade conflicts are a global issue that is detrimental to global stock markets. Just like the 2008 U.S. subprime mortgage crisis, which dragged down Europe and Asia.

Risk warning and disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk