China has a huge surplus with the US and many obstacles to US businesses

The very idea of even a single trade deal inspires markets to imagine an end to tariff madness is in sight. The “deal” with the UK today will be nothing of the sort—it’s show business to keep the stock market dreaming and the hounds off Trump’s back. 

This could vanish in a puff of smoke if China persists in being offended at the assertion from the White House that it was the one seeking the meeting in Switzerland.  And as noted above, the US-UK trade is nearly in balance and the UK has hardly any impediments to US exports. China has a huge surplus with the US and many obstacles to US businesses. A different kettle of fish entirely. Trump is juggling only two plates and is close to dropping one of them, although he always claims every loss is actually a victory and what he intended all along.

It's a bit tiresome to review the Fed meeting yesterday but it does contain some valuable nuggets. The Fed meeting resulted in precisely what was expected—no change. And Mr. Powell’s various comments indicated no rate cuts in sight, so the net-net is named a “hawkish hold.”

Mr. Powell admitted “It’s not at all clear” what to expect by way of tariff-influenced data going forward. Funny, every report and opinion piece calls for an inflation surge and some high percentage calls for recession. Powell agreed the “risks of higher unemployment and higher inflation have risen” but also “we don’t know how this will shake out.”

Somewhat implausible was his assertion that the long-term inflation expectations are flat or down. The reporters missed their chance to ask about multiple one-time shocks that collectively will raise real prices in the real world (and scare the public) even if they do not suffice to move the needle by much. You know, like food and cars. The NYT has a cute headline—recession warnings are everywhere, except in the data.

“We do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity.” This rules out a pre-emptive cut.

He did point out that if you subtract the “record rush of imports,” that negative Q1 growth reading turns back into about 2%. “’The economy is still growing at a ‘solid pace.’” He did admit that this may mask a developing gloom, as the Beige Book certainly disclosed. We say there is a real chance of growing gloom morphing into recession. 

All the same, the Fed is right to stay on hold. It needs to act on data, and the data is not showing inflation or stagnation. And we don’t know when either will appear. Just how far ahead did importers plan? How many workers will lose their jobs and when? How many businesses will go bankrupt? The latest worry is that the US will run out of baby strollers, cribs, tables and toys this month. They all come from China, or did.

Powell seems to think this is a shallow, one-time shock and not a lasting threat to robustness and general stability.

That may well be true, but only if Trump blinks and either makes deals or reduces the extreme highs. But many economists, if not most, think that Trump’s obsession with tariffs is not going to be moderated, or not by much, and will continue to have effects for many months, if not years—the long run Mr. Powell thinks the Fed is measuring.

In other words, the Fed is doing the right thing to stay on hold for lack of data and the Fed is doing the wrong thing by not seeing far enough into the future and cutting rates right away. Powell as much as admitted it: “It’s really not at all clear what it is we should do.”

Fed funds traders got the message. The CME FedWatch tool shows those expecting no change in June rose to 80% from 68.8% the day before. Those expecting the cut to come in July was reduced to 57.2% from 56.7%, not much but a clear direction.

This brings up an uncomfortable question: what if the Fed still doesn’t see the right data to cut in June, only 40 days away. What about July? We don’t know how long all that import front-loading will hold the fort. That would mean no cut until September (84.6% probability). Trump won’t like that one bit.

To return to the bond market, there is a 30-year auction to go but the 3-year and 10-year were well attended and well bought by foreign parties. There’s that extraordinary privilege again, plus a shortage of competitors. 

Finally, take a look at the charts of the Chinese yuan and Mexican peso in the Chart Package. The dollar may be up against the majors but not here.

Forecast

One down, two to go—the Fed did the only thing it could reasonably do, stand pat.

Next up is whatever nonsensical thing Trump does, which will probably be a negative but you never know, it might be tariff relief.

That leaves the budget, where the ultra-conservatives want to get reelected and oppose big White House spending plans. They will probably lose, so that’s another black mark in the dollar’s book—excess deficits.

We can’t find anything dollar-positive here, so the late-day dollar move up yesterday is due only to the Fed not being dovish. It seems Mr. Powell gets the credit for coming across as sane and reasonable, unlike all the others in the government, some of whom are really bad speakers. Today it’s a continuation of dollar firmness on the lie that a deal is getting done with the UK. It’s not a deal. It’s talks about a deal. 

Keep the faith. The threat of capital outflow is very real and very serious. The US is not going to get a trade deal with China in Switzerland this weekend. The US delegation might be able to spin the story to favor the US, but any dollar push can’t last when the real situation is stalemate and therefore US failure.

Tidbit: Capital flight from the US is inhibited for all the reasons already given. But not halted. Today Reuters reports “Ukraine is starting to consider a shift away from the U.S. dollar, possibly linking its currency more closely to the euro amid the splintering of global trade and its growing ties to Europe, Central Bank Governor Andriy Pyshnyi told Reuters.”

In addition, “Europe may be better prepared to absorb a seismic shift in global investment flows than many assume, as a number of regulatory twists are set to bolster euro market depth.” The US markets have the size, liquidity and variety that Europe does not match, so has sent some $7 trillion to the US since 2012. An analyst at TS Lombard impressed Reuters’ Dolan, who reports that changes in insurance industry regs “could free up additional capital and allow a wider pool of public and private equity to be invested in the continent.

“The second measure is a "wildly underreported" push to channel large European private savings into capital markets by developing a more expansive private pension industry across the region.”

“Why this matters is that European households currently hold about a third of their savings in cash and deposits, more than twice the share U.S. households hold. And German savers are the most extreme, with more than 40% of their financial wealth in cash.

“Channeling these savings into institutional investment funds will go a long way to deepening European markets.

“Of course, a crush of untapped savings and returning overseas investment could flood European markets too quickly, saddling the region with an overvalued currency - the very issue America has fretted about for the past decade.”

Tidbit: We just saw one of those self-impressed obnoxious equity guys claim that the new Taiwan dollar event means a lot more to come from the region. “When US investors express a bullish thesis on equities overseas, they are also expressing a bullish thesis on currency markets overseas. They are effectively selling dollars, and buying local currencies.”

He wants to sell you a subscription to a newsletter that will recommend what stocks to buy to take advantage of the situation. Usually self-styled advisors try to hide the “greed is good” attitude because it really is repellant. Here’s the problem: there probably are Asian equities that will be a good buy. That’s why these jerks get away with it.

---

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!