Trump Blinks on China — The Implications
Author: Greg Valliere
August 14, 2019
THE MARKETS CALL THE SHOTS: There’s no question that when it comes to U.S. policy, the stock market — not Donald Trump or Congress — usually calls the shots. That certainly was the case last December, when the Federal Reserve was forced to abandon rate hikes in the face of a market rebellion, and it certainly was true yesterday, when Donald Trump blinked on China.
THE STOCK MARKET SOLD OFF THIS AUGUST because of fears that headwinds from the tariff wars would drive the economy into recession (an over-rated fear, in our opinion). The panic seemed to peak on Monday, as normally sane analysts began to speculate about negative interest rates arriving in the U.S.
TRUMP VIEWS THE MARKETS as the ultimate arbiter of his success or failure. Most of his advisers — with the exception of the extremely controversial Peter Navarro — told the President that fresh tariffs would unsettle the markets, but he wouldn’t listen and sure enough — the stock market sold off. Trump capitulated yesterday, conceding he was worried about hurting U.S. consumers (quite a reversal from his previous mantra).
THIS REVERSAL HAS HUGE IMPLICATIONS: It’s a signal that Trump will take his signals from the markets; as we have written in recent weeks, he will leave no stone unturned in an effort to get the economy roaring ahead of the election — more spending, jawboning the dollar lower, Fed bashing, even proposing fresh tax cuts — and, of course, sending signals that a trade deal with China is coming.
BUT A TRADE DEAL IS NOT IMMINENT: Lifting tariffs on electronics and toys hardly means that Trump can get a meaningful deal this fall. His action yesterday surely will embolden the Chinese, and it has infuriated trade hard-liners like Navarro and many protectionist Democrats, from Chuck Schumer to Elizabeth Warren.
THERE ARE THREE HUGE OBSTACLES TO A TRADE DEAL: First and foremost, there are still at least a half dozen issues that are hopelessly deadlocked; it will take many months to iron these out. Second and more ominously, if Beijing moves to crush the insurrection in Hong Kong, it could elevate the Chinese to global pariah status, dashing hopes for a quick trade deal. Third, the ill will has ratcheted up dramatically, as China accuses the U.S. of fomenting the unrest in Hong Kong.
ONE PRESIDENTIAL TWEET, seemingly softening the U.S. stance on tariffs, is not sufficient to reverse the damage inflicted on U.S. farmers, who are suffering through an economic depression, or small manufacturers, who won’t get quick access to component parts. Thanks to the tariff war, a 3% economy is looking like a 2% economy.
TRUMP UNDOUBTEDLY WORRIES about slowing economic growth and its impact on the markets, so he will amp up the criticism of beleaguered Jay Powell, whose rate-cutting path may become complicated by signs that inflation is moving from cool to warm (as we have predicted all summer).
BOTTOM LINE: The good news is that the markets usually will get their way with this president, who is eager to please investors. The bad news is that Trump’s policies are extremely erratic, announced via tweets that often blindside.
THE CHINESE, facing growing unrest and a weakening economy, should be the ones eager to compromise, but they just won a premature gift from Trump, who got sweaty palms as an over-bought stock market experienced a garden-variety selloff. The Chinese will not forget the panicky precedent that has been set.
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