Is Trump keeping his powder dry for the true trade-and-currency war to come?

Outlook:

To state the obvious, we have a Trump problem. It's not just outrageous and usu-ally false comments, it's inconsistency. Last week we predicted Trump would use the good payrolls number to denigrate the Bureau of Labor Statistics for "phony" data—and the lousy average hourly wage gain to boast about how he will do better (while opposing hikes in the minimum wage). But payrolls came and went with nary a peep. Inconsistency.

This coming Friday Trump will meet with top Japanese officials, who have been repeating almost daily that Japan is committed to the G7 and G20 admonition not to devalue to get a trade advantages—even though that is exactly what Trump himself wants to do. In another show of inconsistency, Trump may not lash out at Japan and the meeting may go well. After all, the Japanese capitulated ahead of time in Trump's eyes—he can devalue the dollar while they are committed not to devalue the yen. Today it was Japan Chief Cabinet Secretary Suga saying Japan is closely monitoring FX, commodity, and yield moves, all of which affect the current account balance.

Yesterday's trade report is another case of the dog that didn't bark. After a year of fulminating against the US trade deficit that is purportedly the fault of previous bad deals, Trump missed the oppor-tunity to rant when the US deficit for 2016 came in $502.25 billion, the biggest in four years. The De-cember deficit was up 3.2% to $44.26 billion, even though exports rose (2.7%) while imports rose by less (1.5%). The biggest deficit is with China ($347 billion in all-2016), then Japan ($69 billion), Ger-many ($65) and Mexico ($63).

Maybe Trump is just keeping his powder dry for the true trade-and-currency war to come. The idea of Trump retraining himself in the cause of a bigger plan is not consistent with what we know about Trump's customary behavior.

A more likely explanation is that he is overwhelmed by the office, managing it badly, and emotionally upset about the barrage of exposure of his lies, protests over his initiatives, and palpable lack of respect from much of the establishment, including the press. Trump says the press is dishonest but it's still do-ing its job of reporting his lies. Yesterday Trump charged the press with failure to cover some 78 terror-ist incidents, all of which were, in fact, covered and more than adequately. As in the campaign, die-hard Trump supporters don't care if he lies, but they are, after all, a minority. And Trump does watch some of the cable TV talk shows and does read the New York Times, and he craves their approval. He's not getting it.

Nobody knows how dangerous this might be.

On another front, emerging markets have been rocked by Trump, with some $5 billion departing EM equity markets for the US in the first few weeks after the election. But last week, according to the WSJ, they returned $1.4 billion, the most in 16 week. And EM bonds have inflows for 4 of the past 5 weeks. The MSCI EM index is up 7% YTD as of Monday—more than double the S&P. Both the Brazilian real and Mexican peso are higher than before the vote.

Analysts say the EM markets were oversold before the election and oversold some more after it, to rock-bottom, so it's only sensible to jump on board. Besides, Trump is likely to under-deliver on the trade war or at least the border tax, according to one manager. It's not as risky as it seems. Another manager also says hot rhetoric on protectionism will give way to more practical measures (he's buying Korean equities). Others worry that we are only one Tweet away from a crash. That's the version we prefer.

Yesterday the FT had a piece by El-Erian saying yes, we now have "unusual uncertainties" in the FX market but the dollar is likely to thrive, anyway. Divergent US policies favor the US. Politics will not derail the dollar rally but will make it "bumpier." And here's a mystery: "Finally, the overall impact on the global economy also depends on whether other countries step up to the challenge of economic re-form. If they do, the new global economic equilibrium would prove sustainable and the dollar would stabilise in an orderly fashion. If they fail, the challenges of dollar appreciation would extend beyond a political backlash in the US, also disrupting financial markets abroad and companies with large curren-cy mismatches, particularly in the emerging world."

Wait a minute—El-Erian accepts mercantilism and all its protectionist miseries as "economic reform"? What economic reform is Trump proposing that others should emulate? We had to go back to parse each sentence to figure it out. First, it seems, is "Whether the cyclical drivers of the European and Japa-nese economic recovery develop deeper, structural roots? Unless they do so, it is only a matter of time until expectations reverse and widen again in favour of US economic outperformance."

Then, secondly, it's normalization by the Fed, which is dragging its heels. Third, pandering to protec-tionists needs to get re-balanced to become part of an overall pro-growth plan that includes deregula-tion and tax reform. And it needs to get the pro-growth part without setting off a trade war.

Well, yes. We admire El-Erian but here he is delusional. Trump doesn't have an overall pro-growth plan and is not likely to veer away from impulsive, piecemeal measures, some of which have the poten-tial to cast havoc on the world. Analysis of Trump actions are starting to feature the term "chaotic"—a lot. And to say Europe and Japan need to step up their game or get left behind in the dollar's dust is to ignore that both places are safe-havens to their own citizens and increasingly, perhaps, to others. Like the rich Middle East and China.

Finally, while political concerns like European elections are an ever-louder humming noise in the back-ground, actual prices still count. Our favorite WSJ reporter, Min Zeng, writes that the inflation bet re-treated. The 10-year breakeven (regular notes minus TIPs) fell to 1.991 percentage points late Tuesday, the lowest since Jan. 17 and from the recent high of 2.069% on Jan. 27, the highest since September 2014. The biggest one-day slide in the 10-year yield was on Monday "as government bonds in France sold off. Marine Le Pen, a far right leader, has threatened to pull France out of the eurozone where the euro is a common currency for the bloc."

And yesterday, the 3-year note auction ($24 billion) had indirect bidding of 57.2%, a proxy for foreign demand--the highest since May 2016. We have more auctions today and tomorrow. "The 10-year Treasury yield has been gyrating largely between 2.3% and 2.6% over the past weeks. For the 10-year yield to break out of this range, there needs to be clarity on the U.S. fiscal stimulus, said Mark Cabana, interest-rate strategist at Bank of America Merrill Lynch. If fiscal stimulus looks likely by the summer, yields would rise, said Mr. Cabana. Yields would decline if stimulus is pushed to 2018, or concerns over European elections, in particular the French election, escalate, he said."

Here's a stunning bit of data: "The share of investors expecting Treasury bond yields to rise was 23% for the week that ended Monday, down from 27% a week ago, according to the weekly Treasury client survey from J.P. Morgan Chase & Co. released on Tuesday. The share of investors expecting lower bond yields was 16%, up from 14%."

El-Erian can prattle on about more favorable US conditions and the near-inevitability of the dollar ris-ing, but that's not what the bond gang sees. The yield differential in favor of the US is impressive but not invincible. It's tedious to try to track yields, not least because every data source has its own version. But if the US bond market sees yields stagnating and/or falling, whether because of LePen or any other cause, the dollar gets a game leg. The implication is that the current dollar upmove could be short-lived, indeed.

Politics: The three-judge Appeals Court session was broadcast live last evening and at times it was gripping and other times, just the usual tedious self-important lawyerly nit-picking. On the whole, the plaintiffs (against the "travel ban," reduced from "Muslim ban") seemed to have the upper hand. One of the arguments echoed Nixon's assertion "If the president does it, it must be legal." Well, we im-peached him.

The government says the ban is a national security issue allocated to the president, subject to some con-stitutional limits—but then the government lawyer couldn't name those constitutional limits. Another good moment was when a judge asked whether anyone from the seven banned countries had actually been charged with terrorism in the US. The government lawyer couldn't answer. The judge answered for him—none. The government lawyers were obviously not well-prepared. That doesn't mean they will lose.

We still don't know whether the 1965 law (no discrimination whatsoever) overrides the 1952 law (some discrimination allowed). It's not clear what the judgment will be, if only because the religious ban part is not proven (it doesn't harm all Muslims), despite clear intent that is, nonetheless, not stated in the order. The ruling, probably next week, is important because if the case goes to the Supreme Court, the Supremes could decline to hear the case and the Appeals Court ruling will then stand.

Currency	Spot	Current Position	Signal Date	Signal Strength	Signal Rate	Gain/Loss
USD/JPY	112.3	SHORT USD	01/05/17	WEAK	115.93	3.13%
GBP/USD	1.2492	LONG GBP	01/24/17	WEAK	1.2451	0.33%
EUR/USD	1.0646	LONG EURO	01/10/17	WEAK	1.0587	0.56%
EUR/JPY	119.56	SHORT EURO	02/03/17	WEAK	121.56	1.65%
EUR/GBP	0.8522	LONG EURO	02/06/17	WEAK	0.8605	-0.96%
USD/CHF	0.9992	SHORT USD	01/05/17	WEAK	1.0113	1.20%
USD/CAD	1.3162	SHORT USD	01/05/17	WEAK	1.3253	0.69%
NZD/USD	0.7303	LONG NZD	01/10/17	STRONG	0.7014	4.12%
AUD/USD	0.7634	LONG AUD	01/05/17	WEAK	0.7343	3.96%
AUD/JPY	85.73	LONG AUD	10/06/16	STRONG	78.48	9.24%
USD/MXN	20.6335	SHORT USD	01/31/17	WEAK	20.8108	0.85%