RPT-COLUMN-Past 'peak uncertainty' or eye of storm?: Mike Dolan

By Mike Dolan

LONDON, May 12 (Reuters) - Far from full steam ahead, financial markets find themselves in the same boat as the Federal Reserve. They really don't know where this historic trade disruption will end up.

Inadvertently, U.S. President Donald Trump and Fed Chair Jerome Powell appeared to agree on one thing last week: the U.S. central bank is clueless. While Trump thinks he knows the answer, Powell just thinks the answers are unknowable right now and clues far away.

"I don't think we can say which way this will shake out," Powell concluded after the Fed left interest rates on hold last week, prompting another stream of complaints from Trump over the following days. But, echoing his boss, New York Fed President John Williams reinforced the point on Friday: "We are experiencing a moment of great uncertainty and change."

Recovering U.S. stock markets know that feeling all too well, but they reckon they priced in a "worst-case" trade war scenario during the turbulence last month and are now just re-calibrating as slightly less scary outcomes unfold.

The optimists see the past month as a sign that Trump will respond to market and business pressure and row back some of the measures that knocked down U.S. stocks and bonds so sharply after the dramatic U.S. tariff sweep was announced on April 2.

But even if Wall Street has regained all the losses incurred since what Trump dubbed "Liberation Day", now what?

"Our view has been that peak uncertainty over trade has passed," says Ulrike Hoffmann-Burchardi, chief investment officer of global equities at UBS Global Wealth Management.

Hoffmann-Burchardi reckons April showed market pressure would encourage "productive negotiations" between the U.S. and its top trading partners.

"While there are likely to be plenty of twists and turns in the weeks and months ahead, recent developments are in line with this hypothesis."

That view harks back to the thinking shortly after the U.S. election in November, when markets rallied despite Trump's well-flagged global tariff plans on the assumption that what the incoming president said and ultimately did would differ and also that the full sweep of his tax-cutting and deregulation agenda would spur economic growth.

The past two months have been sobering in that regard as recession fears ramped up, business and household confidence plummeted, annual stock market forecasts were slashed and fears of foreign investor flight mounted.

And few if any investors are confident about the eventual economic and inflation fallout from a global trade reset.

AS CLEAR AS MUD

As Fed officials detailed at length last week, one problem comes from trying to parse both the shaky "soft" data from sentiment surveys and the more resilient "hard" data on spending, production and jobs.

Powell described the link between the two as "weak" but added: "This is outsize change in sentiment. None of us is looking at this and saying we're sure one way or the other - we're not."

And the compounding problem is that much of the hard data is lagged and skewed by the impending tariff shock itself.

Massive front-loading of imports in the first quarter flattered some U.S. activity and inventory readings, but the resulting net trade impact registered the first contraction of gross domestic product in three years.

According to GDP trackers, like the Atlanta Fed's "GDPNow" model, a bounce this quarter to annualised growth back above 2% is in the works from the limited numbers seen to date.

But the picture is as clear as mud.

While universal 10% tariffs look set to remain, there's a chance Trump's 90-day pause of higher reciprocal tariffs on many countries - and the still uncertain outcomes of bilateral talks to ease them - may mean that some of that skewed first-quarter activity persists this month.

And a glimpse at what may be happening with China, where U.S. tariffs were ratcheted up to 145% last month regardless of the pause elsewhere, can be seen in Port of Los Angeles estimates showing a 35% annual drop in container imports only last week.

Spending and jobs readings, however, have not yet cracked. Retail sales data for April is next on the radar this week.

The inflation outlook, top of mind for the Fed with updated data due this week, is messier still and hinges on a blizzard of imponderables about lags in import contracts, substitution of inputs, dollar exchange rate movements and margin absorption.

The New York Fed's Williams reckons the best guess is that growth is "considerably slower" than last year, with both unemployment and inflation coming in higher.

The corporate earnings take is also affected by the contrast between what's in the immediate rear-view mirror and what's ahead in the windscreen, with guidance from auto firms and others junked due to the uncertainty.

While first-quarter annual profit growth estimates for S&P 500 firms are back around 14%, almost twice what was penciled in at the start of April, full-year forecasts have been cut to below 10%.

In all, the stock market's return to Liberation Day levels may be understandable as a repositioning for a whole variety of outcomes that may not be known for months. Volatility gauges .VIX, at least, have returned to just above historical averages.

But damage there still lingers. The S&P 500 .SPX, Nasdaq Composite .IXIC and Russell 2000 .RUT indexes are still down anywhere from 3% to 10% for the year so far, underperforming Europe and Hong Kong by 20%-25%.

Panic mode may have subsided. Outsize bets on the next direction seem brave at best.

The opinions expressed here are those of the author, a columnist for Reuters