The real Trump shock is how quickly it's over

The Trump Shock was short and sharp, and now it’s over. That may seem an infeasible judgment after one of Donald Trump’s worst weeks in a while. Electorates in several states sent the president a brickbat to celebrate his election anniversary, while the Supreme Court looks likely to administer a major rebuff on his signature issue of trade tariffs. But for markets, and crucially the dollar, the immense shocks he’s administered since returning to power are already in the past.

George Saravelos, who heads foreign exchange research at Deutsche Bank AG, points out that the volatility of both the dollar and U.S. bonds — the amount that investors are willing to pay to protect against future fluctuations — are much lower than a year ago, despite their massive spike after the Liberation Day tariffs were announced in April:

The market is saying the "Trump shock" is over: The trade war is "solved"; fiscal policy is on autopilot (bar the Supreme Court decision on tariffs); the Middle East (i.e. energy prices) are more stable and U.S.-China risks are on ice for at least a year.

The key isn’t so much the level of the dollar, which remains lower than 12 months ago (in line with an administration aim to improve competitiveness), as the way it’s behaving. At the worst of the shock in April, the currency tanked even as investors pulled out of Treasury bonds, pushing up their yields. That’s the dynamic for emerging markets during crises when they lose international confidence. It was alarming to see for the world’s reserve currency.

That’s now a distant memory. The dollar is behaving exactly as might be expected, rising when people are risk-averse because it offers a safe haven, and when higher bond yields give investors a reason to send money to the U.S.

"It’s not been as people thought," says Jean Ergas of Tigress Financial Partners. "Companies have dealt with it fairly well. There’s the wealth effect in the U.S. to help. And the dollar has ceased to be an emerging market currency. When people move into cash, their cash allocation will be to the dollar."

Earlier in the year, as Trump made clear that he was bent on a far more radical interruption of global norms and institutions than in his first term, the dominant narrative was of "de-dollarization." This was seen as an inevitable retreat of capital from the U.S., where the immense buildup in tech shares had left many foreign investors feeling overexposed. Now, the old narrative has returned: American exceptionalism. Despite everything.

As Saravelos says, the global fiscal environment is expansionary (spectacularly in Germany), monetary policy is easing, and the U.S. economy has proved far more resilient than expected. Central to this have been tariffs (not as bad as feared) and artificial intelligence (even better, so far, than backers’ wildest dreams).

TARIFFS

Most important, the trade war has not yet had the dire effects anticipated, though tariffs largely remain at much the same level that prompted April’s turmoil. Most of the rest of the world declined to retaliate, and instead opted to conciliate Trump, contrary to the demands of game theory.

Also, tariffs had a dramatic impact on U.S. government receipts, with monthly tariff revenue hitting $30 billion in October. It was running at $5 billion at the turn of the year. This eases deficit concerns a little and gives the levies a sense of permanency; they’re achieving something.

Companies are warning of trouble ahead, even if in anonymized form that won’t arouse presidential ire. In the Institute for Supply Management’s survey for October, executives offered a litany of complaints, all about tariffs. "The unpredictability… continues to cause havoc and uncertainty on future pricing/cost," grumbled one computer maker. "Customers are canceling and reducing orders due to uncertainty,’’ said a chemicals manufacturer.

But while such anecdotal evidence accumulates, tariffs still have surprisingly little impact on the overall data. Total global trade volumes are on target to rise this year. China, subject to the heaviest levies, has — so far, at least — more than compensated by flooding the rest of the world with exports. That could create its own problems, but does tend to keep inflation down.

Until now, firms have done a great job of finding ways to dull the impact of tariffs, despite the huge sums they’re turning over to Uncle Sam. This shows up in widely changing estimates of the actual rate that companies are paying. Bloomberg Economics’ own estimate, assuming shares of imports continued as in 2024, is 15.9%, after a spring peak of 27.4%. It entered the year at 2.4%.

Ariane Curtis of Capital Economics shows that importers have shifted away from high-tariffed goods, "meaning the actual US tariff rate had only risen to about 11% in August, which is far lower than the 17% implied at the time based on 2024 import shares." The Fitch rating agency has revised its estimate downward — to 13.6% from 16% on Aug. 5 — after the deals with Japan, Malaysia, Thailand, and South Korea, and the new tariffs on lumber, household furniture, heavy trucks, and related parts.

Standard & Poor’s shows that before they were suspended in August, de minimis rules allowing packages below a certain size to escape high levies were used intensely. Over the 10 months to April, 6.5% of all inbound packages, but less than 1% by volume, came via one courier that specializes in small shipments. This has dropped to zero. "With that valve now shut and inventories dwindling, the forces driving global margins are fully exposed," S&P said.

ARTIFICIAL INTELLIGENCE

The AI boom has made the Trump Shock far easier to take. It attracted funds to the U.S., where the biggest "hyperscaling" companies are located. Other countries are making huge investments, but most investors gain exposure to the AI boom by buying into the Magnificent Seven. In the process, they bolster the U.S. market.

The enormous capital expenditures of the dominant chipmaker, Nvidia Corp., and the biggest "hyperscalers" that are aiming to offer AI products — Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp. and Oracle Corp. — are in themselves enough to stimulate the economy. Louis Navellier, a strongly bullish growth stock investor, lays out the case that the money being spent on AI will make a difference:

The simple fact of the matter is that the trillions of dollars in onshoring for data centers, plus the automotive, pharmaceutical, and semiconductor industries, is unprecedented. This onshoring is expected to result in a massive economic boom that will result in over 5% annual GDP growth in 2026.

The risks posed by the scale of the money being deployed and the amount of electricity that the new investments will demand are well known. Asked if AI capital expenditures will collapse "like a house of cards," Marko Papic of BCA Research gives a prompt response. "Absolutely, yes. But not yet."

The hyperscalers continued to increase their investment plans at earnings calls in the last few weeks. They have access to financing, and the money they spend will have effects. The impact on inflation remains controversial. Navellier argues that AI needn’t be inflationary, "since the US dollar is firming up and starting to offset any impact of tariffs on imports. Furthermore, China remains in a deflationary environment, and we are importing that deflation."

INFLATION AND THE FED

Still, inflation remains the critical issue. It’s edging upward, and tariffs are beginning to be felt — but this remains muted. The headline figure, down to 2.3% earlier this year, is now back to 3%. Core goods, the sector most directly affected by tariffs, accounted for only 0.31 percentage points of that — but has risen fast. It started the year negative, as for most of the past two decades (thanks largely to Chinese imports).

Crucially for the political climate, research by Harvard University’s Alberto Cavallo and Jaya Wen shows that tariffs are increasing prices for consumers. Since last year, imported goods have grown 6.6% more expensive, while prices for domestic goods rose almost 3.8%, according to Harvard research. The risk remains that companies will run out of ways to substitute for tariffed goods, and inflation will rise further.

The administration’s current plan to "run the economy hot" and pressure the Federal Reserve to cut interest rates exacerbates these risks. One factor alleviating fears for US institutions has been the recent stall in attempts to fire Fed Governor Lisa Cook and create a more pliant lineup at the central bank. There are limits to how far the Fed can be pushed — but the expectation is that the administration can still get a fair amount of what it wants.

Papic offers this flippant summary, which accurately captures how many traders are thinking:

• Is inflation a risk in 2026? Yes, obviously. Tariffs will increase prices.
• However, inflation is transitory without a fiscal backstop.
• Besides, who cares… the Trump administration will capture the Fed so… YOLO.

For everyone — politicians, businesses, voters and currency traders alike — it appears that rising inflation is the great fear. It’s always possible that, in terms of higher prices, the Trump shock still hasn’t arrived. But until inflation unmistakably hits and forces central banks to respond with higher rates, the attitude is that the Trump Shock is over, and markets are back to normal. You only live once.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator at the Financial Times, he is author of "The Fearful Rise of Markets."