A US-China trade deal where China doesn't lose is bad for the USD

What to Worry About Today: Bad dealing.

It’s not clear what Trump wants out of China. He may not know himself. His seeming conciliatory comments yesterday are at odds with earlier bluster and bullying. The top trade guy, Lighthizer, is presumably tearing his hair out. And where does this currency clause come into things? Nobody has ever heard of a trade deal that contains a currency clause, although the French perhaps had such a thing back in the 19th century, the age of mercantilism. Because a currency clause is so out of place, the idea likely came from Trump.

After the stock market debacle in December, Trump got the message than his behavior was at fault. So now he is changing his tune at exactly the wrong moment in the negotiating process. The Chinese are probably not confused at all—they may think Trump is “cracking” and since he can’t get what he wants, they have to offer even less than they were offering before. In other words, erratic behavior is worse than an unyielding position at this last-minute. It’s not the conciliatory aspect at fault, it’s the erratic behavior and obvious lack of coordination or even communication between Trump and Lighthizer, who was blind-sided by the Trump comments.

Those who mismanage a process are doomed to get a lousy outcome. Here’s the thing: a US-China trade deal where China does not lose is good for the world, bad for the dollar.   

Outlook:

“Patience and flexibility” in monetary policy was effective in getting an important metric shifted to the upside, the National Association of Home Builders housing index for Feb. Builder sentiment rose 4 points to 62. Buyer traffic rose 4 points to 48, current sales conditions rose 3 points to 67, and sales expectations over the next six months increased 5 points to 68. February is the second month of improvement, so early days. Still, mortgage applications also rose 3.6% m/m, implying the collapse of the real estate market was overhyped. 

Yesterday Cleveland Fed Pres Mester said if she had her druthers, the Fed would stop reducing the Fed’s balance sheet. We may find out how widespread this feeling is among the FOMC when we get the minutes of the last meeting (2 pm today). We keep trying to hold uppermost in our mind that the Fed did NOT say “no hikes this year” and did NOT say “the next move is a cut,” but it’s hard because those are the expectations markets seem to believe.

While the US-China trade war and its cousins, NAFTA and the European auto tariffs, are the headline grabbers, the institutional framework is the key to forecasting the dollar. We are probably in for an unhappy day if the minutes show a less dovish slant to the Fed’s deliberations. Wait-and-see might be okay for a few months, but be end-March we want to see an update. By June, if we don’t have a fresh outlook, markets will be in a dither. The market wants guidance, if when it disagrees with the guidance. Wait-and-see is not a good policy position.

If the minutes do come out even more dovish than anyone now thinks, the dollar can nosedive. But then perspective will kick in. What is it going to nosedive against? Sterling? A sterling rally is, literally, silly under the circumstances. The euro? We get flash PMI’s this week and they might cement the stagnation/slowdown idea. The only real winners will be higher-yielders and emerging markets.

Tidbit: News junkies are all aflutter over the latest Whir House scandal. The story is incomplete but seems to involve former National Security Advisor Flynn having resigned of his own accord and not having been fired, after all (so the White House lied yet again). He may have resigned to keep his role in selling nuclear technology to Saudi Arabia, purportedly for energy purposes, a ridiculous excuse given the Saudi oil reserves. And this project is still in the works, despite selling nuclear to the Saudis a direct violation of US law. The FT reports that all sane persons in government oppose the sale. “Republican senators including Marco Rubio, Cory Gardner and Rand Paul sent a letter to Mr Trump in October urging him to suspend talks on a potential civil nuclear co-operation agreement with the kingdom, on the grounds of ‘serious concerns about the transparency, accountability and judgment of current decision makers in Saudi Arabia.’”

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