Trump lies and China obfuscates
|Outlook:
We continue to think it's foolish to consider the latest development in the trade war as anything positive. Trump lies and China obfuscates. China has a small hammer to told over Trump's head because of his lie about China calling to resume talks, but it may be a feather. Trump says he is "winning" but in reality, China has made no concessions at all. The only thing resembling a concession is its refusal to retaliate against the newest US tariffs—arriving Sept 1—for the moment. It is also setting the yuan at non-confrontational levels, although that's so subtle it's not clear Trump can see it.
China wants the US to remove some or all of the tariffs in order for talks to have a chance. The US wants China to change its way of doing things, like subsidizing state industries that export things like steel to the US. Neither side is likely to get what it wants and the fuse in still lit on the dynamite. Nobody knows when the explosion will come, but come it will. We guess China is buying time. What for, we don't know. Moving supply chains and production to other neighbors, maybe. Building even bigger trading relationships with Europe.
The absence of bad news on trade is not the presence of good news.
This outlook is why we distrust the recent improvement in the dollar against the havens, the yen and Swiss franc. The indicators are clear—we have a mini-trend in both for a stronger dollar. But if that move is built on the false assumption of a lull in the trade war, it can't last. In our trading signals, we reluctantly want along with it, but it's likely a trade that will end in tears.
Another trade likely to disappoint is long USD/CAD. Today Canada reports Q2 GDP and it's expected to surpass the US by a lot—3% vs. 2% and a tidy gain from 0.4% in Q1. This will cement the feeling that Canada recovered from the unexpected soft patch that embarrassed Mr. Poloz earlier this year, and make it a whole lot harder for the BoC to follow the Fed with a cut, assuming the Fed cuts in Sept. Or not. Some indicators point to a lousy number today, specifically that the CAD stopped tracking oil higher. A disappointing number today can leave us where we started—CAD on the backfoot. The BoC meets next week, so comments might be interesting.
The US data today includes the University of Michigan final reading of August consumer confidence but we already know from retail sales and the GDP consumer spending component that it's pretty good. We also get July personal income and consumption, not of much interest because it's too soon for the tariffs to have hit much. The embedded PCE deflator is something else. If it comes in as weak as expected, the Fed will have a dandy excuse to cut in September. The headline rate is probably the same 1.4% and the core the same 1.6%. So a question arises over the level and the rate of change. The Fed might be able to cobble together a story indicating rate of change as a key element of a rate decision. This is not necessarily phony as economics but it does stink a bit as public relations.
In background news, it's not only farmers going bankrupt at a fast pace—it's also shale producers, according to the WSJ. And the administration is allowing producers of methane to ignore environmental regulations. Methane is a bigger contributor to global warming than carbon dioxide, as all those jokes about flatulent cattle attest.
If Carville was right that elections are won on "It's the economy, stupid," Trump is getting into hot water.
Off on the side, the White House is continuing to offend everyone with a sense of decency—the US is expelling families who are in the US on temporary medical emergency visas. Not content to put children in cages, now we are delivering a death sentence. Not to be snotty, but doesn't Canada or some other country with advanced medical care offer to take them?
Separately, Hurricane Dorian is going to hit the Florida peninsula this weekend. It will be the biggest in 15 years and has the potential to cost a fortune. But Trump has been diverting emergency relief money from FEMA to border spending on repelling immigration. This has the potential to create a lot of suffering. In the richest country in the world.
Many folks and not just Americans are already off at the beach for the last weekend of summer. We expect nothing much to happen today or even Monday, when Europe is back but the US is not. Start gearing up for a fraught September.
Note to Readers: Next Monday, Sept 2, is Labor Day in the US. Markets are closed. We will not publish any reports.
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