In today’s hearing in the IEEPA case at SCOTUS, the US Supreme Court appeared skeptical of President Donald Trump’s sweeping global tariffs, as key justices suggested he had overstepped his authority with his signature economic policy. Chief Justice John Roberts, Justice Neil Gorsuch & Justice Amy Coney Barrett appeared to find IEEPA use illegal. Justice Brett Kavanaugh seemed to be the only judge to look agreeable to Trump’s use of IEEPA. Justice Samuel Alito seemed to suggest an appetite for resolving the refunds matter sooner rather than later. We now expect a 7-2 version in favor of IEEPA being declared void. Trump still does have other options to replace IEEPA but all of them carry their own risks. Eliminating IEEPA implies refund of 150 BN USD which will be a vexing affair for court to decide. From a market perspective, any ruling that deems the IEEPA tariffs illegal would likely trigger initial weakness in DXY as markets price in a lower terminal rate and a renewed disinflation trend. But the long end UST yields will drift higher due to fiscal worries. This will lead to a steeper curve and a weaker dollar. From a tariff point of view, the trade weighted average tariff rate will fall to 6% from the current 15% if SCOTUS deems IEEPA illegal. Some of the upswing in long end UST yields has already happened today but 10yr UST yield is likely headed higher towards 4.20-4.25 if the Supreme Court ruling does come any time soon.
