Week of Apr 20 2025

The most revealing aspect of this regime shift is the breakdown in traditional market relationships—interest rates no longer drive the US dollar, EURUSD rises despite falling German yields, and the Nikkei strengthens while USDJPY weakens. This disconnect between typically correlated assets suggests institutional capital flight from US markets, which could accelerate if the Supreme Court enables political control of monetary policy. The emerging market dynamics already visible—selling bonds, stocks, and currency—would likely intensify as global investors reassess the risk of holding dollar-denominated assets under politically controlled monetary policy.

The technical picture remains delicate. The S&P 500 is in a fragile consolidation phase after an 18% correction from March highs above 6100 to recent lows under 5000. While price has stabilized around 5200, momentum indicators show no convincing upside follow-through, with scores remaining suppressed in the 0-2 range despite last week's "textbook bear market short squeeze." The SPX volatility term structure has normalized somewhat as short-term implied volatility declines, suggesting eased immediate market fears. However, when VIX exceeds 50 (as it did briefly last Tuesday), markets typically see negative or flat returns near-term before substantial 6-12 month recoveries—a pattern that Fed independence concerns could dramatically alter.

The left-tail risk scenario has become more concrete and immediate. Beyond long-term tariffs leading to stagflation, we now face the prospect of a Fed Chair serving "completely at the pleasure of Trump"—meaning a Fed under constant pressure to cut rates regardless of inflation risks. This would create unprecedented monetary policy uncertainty, potentially triggering a crisis of confidence in US financial assets. While Powell believes the current Supreme Court case doesn't apply to the Fed, White House officials are reportedly watching developments closely "as they consider the president's next steps on Powell."

A right-tail opportunity would emerge under two conditions: U.S.-China negotiations yield substantial tariff reductions AND the Supreme Court either declines to hear the agency independence case or explicitly preserves Fed independence. While extreme negative sentiment readings suggest such positive catalysts could trigger a substantial technical bounce, resolving both trade and institutional threats simultaneously appears increasingly unlikely.

Looking ahead to Week 17, markets must monitor economic data, Fed speakers, and developments in the Supreme Court. Tesla's earnings on Tuesday, Wednesday's US S&P PMI data, the Fed's Beige Book release, and Fed presidents' speeches take on heightened significance as markets assess whether the economy can withstand this dual threat of trade uncertainty and potential monetary policy instability. The reaction to Chinese vessel fees and any Supreme Court developments will test whether we're heading toward stabilization or confirming a structural regime shift with elevated systemic risks.