ORLANDO, Florida (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Tariff ruling and counter-ruling

Tariff confusion reigned on Thursday as investors digested a U.S. trade court ruling late Wednesday against most of President Donald Trump's tariffs. They initially cheered the news, but by the time a U.S. appeals court reinstated the duties just before the Wall Street close, that optimism had largely evaporated.

In my column today I look at how structurally higher U.S. borrowing costs in the coming years mean the fiscal 'precipice' Washington faces may be even nearer than it seems. More on that below, but first, a roundup of the main market moves. 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. U.S. court's tariff ruling gives markets short-term pop,long-term angst 2. Trump's tariff tally: $34 billion and counting, globalcompanies say 3. Trump, Fed's Powell meet at White House, Fed says 4. Nvidia ( NVDA ) discloses more China risks, but CEO praises Trump 5. Germany's return as world's top creditor may befleeting: Mike DolanToday's Key Market Moves

* Wall Street's rally fades, and benchmark indices end upa maximum of 0.4%. Nvidia ( NVDA ) shares hit a 4-month high followingthe firm's results and outlook, up 3.2% on the day and 65% fromthe April 7 low. * In Asia, Japan's benchmark Nikkei 225 index rises nearly2%, its best day in over a month, and Chinese tech stocks climb2.5%. * U.S. Treasury yields fall as much as 5 bps across thecurve, with a 7-year note auction registering strong demand. * Japan's 40-year bond yield slides 21 bps to 3.10%, itslowest in over a month and sharply down from last week's recordhigh 3.675%. * Gold snaps a three-day losing streak, rising nearly 1%to $3,315/oz.Courting confusion

As if the fog of uncertainty shrouding markets wasn't thick enough, investors' visibility has been dimmed further by a U.S. court ruling that most of Trump's tariffs are unlawful, followed by an appeals court reinstating them while the appeal process unfolds.

The administration will likely find other legal avenues to implement its tariffs if need be, so the net effect may ultimately be minimal. But the ruling and appeal could affect Washington's negotiations with major trade partners, timelines, and how countries play their hand.

For investors, the upshot is more uncertainty and less clarity.

The latest twists come just as it looked like tariff revenues were beginning to pick up. Donald Schneider at Piper Sandler on social media platform X this week estimated that tariff revenues were coming in at an annualized pace of $255 billion, up from a "norm" of about $85 billion, while analysts at UBS on Thursday said tariffs were on track to generate $300-450 billion in annual revenues. Wednesday's court ruling, however, would cut that to below $200 billion.

On the other hand, of course, lower tariffs are immediately positive for growth and reduce the likelihood of retaliation from other countries.

Senior administration officials downplayed the impact of the trade court block, but it is notable that Trump himself hasn't commented yet.

He was busy on Thursday, to be fair. He had a "meaningful" telephone call about trade and tariffs with Japanese Prime Minister Shigeru Ishiba, then later hosted a private meeting at the White House with Federal Reserve Chair Jerome Powell.

The two discussed growth, employment, and inflation, and Trump reiterated his view that the Fed is making a "mistake" by not cutting interest rates. The meeting, their first since 2019, comes a day after Fed minutes underscored exactly why policymakers haven't cut rates - unprecedented uncertainty.

Before all that, investors on Thursday were also digesting Nvidia's ( NVDA ) earnings and forecasts, and revised U.S. GDP data. They have an even heavier dose of top-tier data to deal with on Friday, which includes the latest inflation snapshots for Tokyo, Germany and the United States, as well as first quarter GDP readings from India, Brazil and Canada.

High yields bring U.S. fiscal 'precipice' even closer

Few would disagree that U.S. public finances are deteriorating, but debt Cassandras have been warning of a fiscal day of reckoning for 40 years and it has yet to arrive, so why should this time be any different?

The non-partisan Congressional Budget Office's baselineforecast sees federal debt held by the public rising to 117% ofGDP over the next decade from 98% last year, and net interestpayments rising to 4% of GDP, a sixth of all federal spending.

While these eye-watering figures are concerning, it stillseems difficult to fathom the United States experiencing agenuine debt crisis where investors turn their backs onTreasuries and the dollar, the two cornerstones of the globalfinancial system.

Both should enjoy strong demand - at least for theforeseeable future - even if their prices may need to fall toattract buyers. And in times of extreme crisis, like 2008 and2020, the Fed can always buy huge quantities of U.S. bonds tostabilize the market.

But that doesn't mean investors should ignore the swellingtide of fiscal gloom. We may not see a full-blown debt crisis,but there's a sense that "the fiscal" matters for markets morenow than it has for decades.

ECONOMIC ASSUMPTIONS

To better understand the risk at hand, it's useful toexplore the assumptions baked into the current U.S. debt anddeficit projections.

The CBO's comprehensive fiscal projections are a benchmarkfor many policymakers and investors. But amid the fog ofuncertainty created by U.S. President Donald Trump's trade war,the baseline economic assumptions underlying this outlook may betoo optimistic.

The CBO assumes that the United States will experiencecontinuous, uninterrupted economic growth over the next decade.While it's true that since 1990 the U.S. economy has twice goneon streaks of more than a decade without experiencing arecession, conditions today - not the least of which is thecountry's bloated public debt burden - suggest that a repeat ishighly unlikely.

And in the event of a downturn, U.S. public finances wouldalmost certainly suffer the double whammy of shrinking taxreceipts and a surge in benefit payments, pushing the countrycloser to a fiscal cliff.

Of course, an economic downturn would probably also promptthe Fed to lower interest rates, which would likely cause bondyields to fall and offer some relief on debt-servicing costs.

But investor angst over the debt may keep market-basedborrowing costs higher than they would otherwise be, somethingthat is also not baked into the CBO's central projections.

And if government borrowing costs over the next decade arehigher than currently projected, the U.S. fiscal picture is evenmore troublesome than thought.

YIELD CURVE ASSUMPTIONS

Yield curve assumptions play a major - and oftenunderappreciated - role in U.S. debt sustainability projections.

The current CBO projections are based on the expectationthat the yield curve will "normalize" in the coming year. Theyassume that the three-month Treasury yield will fall to 3.2% andthe 10-year yield will settle at 3.9%. But what if the yieldcurve stays near current levels over the next decade, with athree-month rate of 4.40% and a 10-year yield of 4.50%?

Chris Marsh at Exante Data crunches the numbers and findsthat, in this scenario, federal debt held by the public couldrise to 125% of GDP by 2034 and interest payments as a share ofrevenue would approach 30%.

Interest payments as a share of revenues are already aboutto exceed their late-1980s peak and may end up at the highestlevel since at least the 1950s.

Adding to this concern, Saul Eslake and John Llewellyn atIndependent Economics note that if the yield curve does notnormalize, the United States could get in the dangerous positionwhere nominal GDP growth remains persistently below the 10-yearTreasury yield, meaning debt dynamics would deteriorate becauseinterest payments would outstrip growth.

Given that the Trump administration's current budget bill isexpected to add nearly $4 trillion to the federal debt over thenext decade, the risk of this is especially pertinent today.

One consequence of higher-for-longer U.S. interest ratesthen could be a much-heavier-for-much-longer debt burden.

What could move markets tomorrow?

* Japan retail sales, industrial production, unemployment (April) * Japan Tokyo CPI inflation (May) * India GDP (Q1) * Brazil GDP (Q1) * Germany retail sales (April) * Germany CPI inflation (May) * ECB Governing Council member Fabio Panetta speaks * Canada GDP (Q1) * U.S. PCE inflation (April) * University of Michigan U.S. consumer sentiment, inflationexpectations (May, final) * Three Federal Reserve officials scheduled to speak -Atlanta Fed President Raphael Bostic, San Francisco FedPresident Mary Daly, and Chicago Fed President Austan GoolsbeeOpinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.