ORLANDO, Florida, May 29 (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,

global

companies 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 be

fleeting: Mike Dolan

Today's Key Market Moves

* Wall Street's rally fades, and benchmark indices

end up

a maximum of 0.4%. Nvidia ( NVDA ) shares hit a 4-month high following

the firm's results and outlook, up 3.2% on the day and 65% from

the April 7 low.

* In Asia, Japan's benchmark Nikkei 225 index rises nearly

2%, its

best day in over a month, and Chinese tech stocks climb 2.5%.

* U.S. Treasury yields fall as much as 5 bps across the

curve,

with a 7-year note auction registering strong demand.

* Japan's 40-year bond yield slides 21 bps to 3.10%, its

lowest in

over a month and sharply down from last week's record high

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 baseline

forecast sees federal debt held by the public rising to 117% of

GDP over the next decade from 98% last year, and net interest

payments rising to 4% of GDP, a sixth of all federal spending.

While these eye-watering figures are concerning, it still

seems difficult to fathom the United States experiencing a

genuine debt crisis where investors turn their backs on

Treasuries and the dollar, the two cornerstones of the global

financial system.

Both should enjoy strong demand - at least for the

foreseeable future - even if their prices may need to fall to

attract buyers. And in times of extreme crisis, like 2008 and

2020, the Fed can always buy huge quantities of U.S. bonds to

stabilize the market.

But that doesn't mean investors should ignore the swelling

tide of fiscal gloom. We may not see a full-blown debt crisis,

but there's a sense that "the fiscal" matters for markets more

now than it has for decades.

ECONOMIC ASSUMPTIONS

To better understand the risk at hand, it's useful to

explore the assumptions baked into the current U.S. debt and

deficit projections.

The CBO's comprehensive fiscal projections are a benchmark

for many policymakers and investors. But amid the fog of

uncertainty created by U.S. President Donald Trump's trade war,

the baseline economic assumptions underlying this outlook may be

too optimistic.

The CBO assumes that the United States will experience

continuous, uninterrupted economic growth over the next decade.

While it's true that since 1990 the U.S. economy has twice gone

on streaks of more than a decade without experiencing a

recession, conditions today - not the least of which is the

country's bloated public debt burden - suggest that a repeat is

highly unlikely.

And in the event of a downturn, U.S. public finances would

almost certainly suffer the double whammy of shrinking tax

receipts and a surge in benefit payments, pushing the country

closer to a fiscal cliff.

Of course, an economic downturn would probably also prompt

the Fed to lower interest rates, which would likely cause bond

yields to fall and offer some relief on debt-servicing costs.

But investor angst over the debt may keep market-based

borrowing costs higher than they would otherwise be, something

that is also not baked into the CBO's central projections.

And if government borrowing costs over the next decade are

higher than currently projected, the U.S. fiscal picture is even

more troublesome than thought.

YIELD CURVE ASSUMPTIONS

Yield curve assumptions play a major - and often

underappreciated - role in U.S. debt sustainability projections.

The current CBO projections are based on the expectation

that the yield curve will "normalize" in the coming year. They

assume that the three-month Treasury yield will fall to 3.2% and

the 10-year yield will settle at 3.9%. But what if the yield

curve stays near current levels over the next decade, with a

three-month rate of 4.40% and a 10-year yield of 4.50%?

Chris Marsh at Exante Data crunches the numbers and finds

that, in this scenario, federal debt held by the public could

rise to 125% of GDP by 2034 and interest payments as a share of

revenue would approach 30%.

Interest payments as a share of revenues are already about

to exceed their late-1980s peak and may end up at the highest

level since at least the 1950s.

Adding to this concern, Saul Eslake and John Llewellyn at

Independent Economics note that if the yield curve does not

normalize, the United States could get in the dangerous position

where nominal GDP growth remains persistently below the 10-year

Treasury yield, meaning debt dynamics would deteriorate because

interest payments would outstrip growth.

Given that the Trump administration's current budget bill is

expected to add nearly $4 trillion to the federal debt over the

next decade, the risk of this is especially pertinent today.

One consequence of higher-for-longer U.S. interest rates

then 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, inflation

expectations (May, final)

* Three Federal Reserve officials scheduled to speak -

Atlanta Fed

President Raphael Bostic, San Francisco Fed President Mary Daly,

and Chicago Fed President Austan Goolsbee

Opinions 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.