It’s in Trump’s best interests to drag the trade war out for as long as possible

Outlook:

We have changed our minds. In the new section above on US politics, we acknowledge that the new normal is a longer-lasting US-China trade war than we thought. The China trade war is one of three Trump face cards and he is not letting go of any of them. He should, to assure no recession, but Trump's priority is not the welfare of the US, but rather his re-election.

Among voters, even those disgusted and repelled by his conduct have to admit his attacks on China are long overdue and wildly popular. So, we were wrong to imagine something will happen on Sept 1 or later this fall. It's in Trump's best interests to drag it out for as long as possible, even if in the end he has to cave. We know he is prone to caving, but not in this case because prolonging the trade war is in his political best interests.

If the China trade war is the central reason for a sense of turmoil and uncertainty and dread abroad in the world today, we can only expect more of the same, regardless of Fed rate cuts. To add to this unholy mess, we must expect Trump and Johnson to stir up as much turmoil as possible at G7 this weekend. It's likely in Trump's best interests to join forces with Boris against those stuffy, snooty Europeans and to hell with good manners. Eeek!

As for the hypothetical US recession, it's looking more reality-based now that the Markit PMI has disappointed. TradingEconomics reports "Manufacturing PMI in the US fell to 51.2 in July 2019 from 51.7 in the previous month, missing market expectations of 53.4. The latest reading pointed to the weakest pace of expansion in the manufacturing sector since August 2016 as production growth slowed sharply while the pace of job creation was near a three-year low." See the chart.

We still think a recession can be averted, but it's not clear how if Trump is retreating from tax cuts and wants to prolong the China trade war. The only other option is a fiscal initiative. Unhappily for the prospect of a weaker dollar, a new infrastructure initiative would be only dollar-positive.

The one thing that might be a little dollar negative is the growing dissent at the Fed, with three regional presidents now coming out and saying another cut is not really needed (Boston's Rosengren, Kansas City's George and Philadelphia's Harker). Dallas' Kaplan seems to have folded. But realistically, dissent from the regionals does not suffice to stay Powell's hand. We will heed what he says at Jackson Hole, but it's not really useful—the Sept cut is baked in the cake.

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.

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