Don't celebrate too early for the U.S. Supreme Court overturning Trump's tariffs? Wall Street expects the market reaction may be short-lived

The U.S. Supreme Court ruled that the global tariffs implemented by Trump last year under the Emergency Economic Powers Act were illegal, causing fluctuations in asset prices. Wall Street generally believes that the market's positive reaction may be short-lived. Traders are quickly shifting their focus to the White House's alternative plans—the Trump administration has indicated that it has other legal tools to re-implement tariffs.

According to CCTV News, on the 20th local time, the U.S. Supreme Court ruled that the large-scale tariff measures implemented by the Trump administration under the International Emergency Economic Powers Act (IEEPA) lack clear legal authorization. This ruling suspends most of the tariffs currently imposed by the Trump administration, including the so-called "fentanyl tariffs" and the reciprocal tariffs first announced in April last year. Following the announcement of the ruling, the U.S. dollar index turned lower, U.S. Treasury prices fell, and major U.S. stock indices expanded their gains.

The media believes that, overall, the market's reaction to the ruling has been relatively mild. About an hour after the ruling was announced on Friday, the yield on the 10-year U.S. Treasury rose by about 2 basis points, the Bloomberg Dollar Spot Index fell by 0.2%, ending a four-day rise, and the S&P 500 index rose less than 0.8% at its peak during the day. One important reason for the relatively mild fluctuations in U.S. stocks, bonds, and currencies is that the market had previously leaned towards this ruling outcome, and Trump subsequently indicated that alternative plans were already in place.

Commentators believe that the negative impact of the ruling on the U.S. bond market should be particularly evident. Tariff revenues had been used to offset the impact of Trump's tax cuts, and the ruling eliminates this revenue source, which could lead to a further widening of the $1.8 trillion federal budget deficit. The Tax Foundation estimates that the overturned tariffs were expected to generate over $1 trillion in revenue over the next decade.

Strategists indicate that although Trump has at least five alternative legal tools to re-impose tariffs, whichever method is used will exert upward pressure on long-term U.S. Treasury yields.

Wall Street expects the market's positive reaction to be unsustainable

Several strategists point out that the market's positive reaction to the ruling may be short-lived. Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets Corp, stated, "The Supreme Court's decision has been widely anticipated by market participants, so it is not surprising that the U.S. interest rate market's reaction is limited."

Aroop Chatterjee, managing director at Wells Fargo Securities, believes, "We expect the relief brought by the Supreme Court ruling to be a temporary positive risk factor, primarily achieved through reducing uncertainty. The government retains significant tariff-setting authority through other regulations, but some of these methods are untested, while others will take time. We still believe the government will replace most tariffs through other means, but this is a mid-term issue."

Dave Mazza, CEO of Roundhill Financial, warned, "The market will view the removal of tariffs as a short-term positive, as it eliminates immediate tax burdens on the supply chain and removes an unresolved factor. However, this is not the end of the tariff story; it is the beginning of the next chapter, and the future path may mean more legal and policy reversals rather than fewer Miller Tabak + Co LLC Chief Market Strategist Matt Maley pointed out: "Many investors have been expecting the Supreme Court to rule this way, so they seem to be more focused on the situation in the Middle East this weekend. But I do think this eliminates some uncertainty. What we are seeing more in the market is a reaction of 'good news fully priced in.'"

Bond Market Worries About Deteriorating Fiscal Deficit

Reports suggest that the Supreme Court ruling has raised concerns in the $30 trillion U.S. bond market, as it may increase the government budget deficit and pour more fuel on an economy already grappling with high inflation. Following the ruling, prices of long-term bonds, which are most sensitive to future fiscal risks, fell, with the yield on 30-year U.S. Treasuries rising by a basis point to 4.75%, before narrowing its gains.

Deutsche Bank interest rate strategist Steven Zeng stated: "This is a net negative for the fiscal outlook. Without tariff revenue, the deficit may be higher than the previous baseline. This means the Treasury will need to issue more bonds to fill the fiscal gap. That’s why U.S. Treasury yields are rising."

The issue of refunds has become another focal point. The Supreme Court has left the refund issue to lower courts. Economists from the University of Pennsylvania estimate that over $175 billion in tariff revenue faces refund risks.

Rabobank's head of foreign exchange strategy Jane Foley warned: "While it is expected that the White House will find another way to push tariffs forward, there will be concerns about (tariff) refunds, which may unsettle the U.S. Treasury market, given the already weak fiscal situation in the U.S., this could shake the dollar."

Marlborough Investment Management portfolio manager James Athey stated: "I think this news is slightly bearish for U.S. Treasuries. It has a short-term negative impact on the budget, so it should be bearish for U.S. Treasuries. But it's hard to see how it will actually play out—it's very complicated."

However, RBC Capital Markets LLC U.S. interest rate strategy head Blake Gwinn holds a different view. He believes the ruling is a "narrative favorable for growth and risk," which will alleviate the burden on businesses, "and should outweigh any thoughts that yields should decline due to lower inflation or allowing the Federal Reserve to cut rates."

Political Uncertainty Becomes New Focus

Wall Street Journal previously mentioned that, in addition to the IEEPA rejected by the Supreme Court, Trump has various legal tools available. For example, he could invoke Section 232 of the Trade Expansion Act of 1962 to impose so-called national security tariffs, or initiate investigations under Section 301 or Section 201 of the Trade Act of 1974, but these methods would take longer to implement tariffs.

Renaissance Macro Research head of economic research Neil Dutta pointed out that the issue is now more political than economic Dutta said: "I don't think we've heard the last of Trump and tariffs. The legal framework that Trump can utilize is very broad. The one he is using (IEEPA) has the weakest legal foundation. The question is, if he doesn't restart the tariff threat, he basically looks like a lame duck. If he decides to concede, then he is politically finished."

Valentin Marinov, head of G-10 foreign exchange research and strategy at Credit Agricole, stated: "Before the Supreme Court ruling is announced, we expect a ruling unfavorable to Trump's tariffs could severely undermine his administration's trade policy, and the resulting policy uncertainty could harm the U.S. growth outlook in the short term. The reaction in the foreign exchange market has been relatively mild. I suspect this is due to the lingering uncertainty surrounding the situation in Iran."

Win Thin, chief economist at Bank of Nassau 1982 Ltd, summarized: "We are now preparing for a period of uncertainty, as details regarding potential alternative tariffs will emerge in the coming weeks. This is another reason many Federal Reserve officials want to keep interest rates unchanged, but I continue to watch for economic weakness, which will ultimately prompt them to cut rates."