New China Trade Talks, Upcoming Fed Meeting are More Important for Markets than Impeachment
Author: Greg Valliere
October 7, 2019
OVERVIEW: Rarely have we seen such chaos in Washington, with House impeachment now looking likely. For our readers, focused primarily on the economy, two other issues will dominate the markets before a Senate trial begins, probably in late winter:
1. China trade talks will resume this week, amid growing pessimism over agreeing to a sweeping pact this winter. As one source told us over the weekend, “it’s either no deal or a piecemeal deal.” It’s possible, she said, to reach an agreement for China to buy more U.S. energy and agricultural products, in exchange for Chinese assurances to stop stealing American intellectual property. This modest pact could be accompanied by some reduction in tariffs.
That would be quite a come-down after the U.S. and China had to endure a full year of uncertainty and softening economic growth. But with President Trump in a fight for his political life, a modest package would allow him to boast that farmers and U.S. businesses would benefit — and the markets could conclude that the trade war has peaked, with further agreements possible in 2020.
But make no mistake — a comprehensive deal isn’t in the cards, certainly not soon. And even a modest deal could be derailed by two huge wild cards: a looming move by Beijing to crush the insurrection in Hong Kong, and a growing suspicion that the Chinese may decide to wait to cut a deal until after the U.S. election, when they might get a U.S. leader who’s easier to negotiate with.
2. The upcoming Oct. 29-30 Fed meeting, which seems too close to call. Before last Friday, a rate reduction was looking possible, but a 3.5% unemployment rate makes some Fed officials reluctant to waste any more ammunition on an economy that’s growing moderately. Nevertheless, downside risks dominate, including the GM strike, which could have a ripple effect throughout the economy this fall.
The key issue for Fed Chairman Jay Powell is whether he has the votes in the FOMC for a rate cut later this month. Our sense is that a majority of Fed officials are on the fence, waiting for more data — including CPI this Thursday — before deciding. Donald Trump’s vitriolic tweets aren’t the key Fed variable; it’s the markets, which could react very negatively if the Fed sends a stand-pat signal in upcoming days.
AND THEN THERE’S IMPEACHMENT: New bombshells are certain, and House impeachment is likely, but for now we’ll stick with our view that there’s no more than a 25% chance of conviction in the Senate. A fierce counter-narrative is taking shape on the right, which believes this is a coup attempt, designed to overturn the 2016 election, aided by an out-of-control media. At least one-third of all Americans believe this, and it has intimidated Republicans in Congress.
TRUMP’S BRAZEN CALL ON CHINA to investigate Biden emboldened many shaky Democrats, who say in private that impeachment could backfire on the party. They worry that they’re walking into a trap set by Trump, and they share a widespread view in Washington that Adam Schiff is a lighting rod.
BUT CAN THE DEMOCRATS TURN BACK NOW? Unlikely, so they will accept the risk of association with the unsavory Hunter Biden and will lose altitude on the issues they hoped to ride to the White House — health care, climate change, etc. Impeachment is a blessing and a curse for Democrats, who have another huge problem to deal with: isn’t there anyone more electable than Biden or Elizabeth Warren?
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