The China trade war keeps his name in the spotlight

What to Worry About Today: Trump's mental conflicts.
Trump has a problem. His instincts tell him to keep fighting with China over trade because his political base loves seeing him pugnacious. Besides, he doesn't have a long-term strategic plan replete with actual goals and targets. He has no realistic expectation of how the trade balance will deflate and in what sectors. He is simply throwing spaghetti and the wall and seeing what sticks.

As a political tactic, making a deal with China is the last thing he wants to do. Besides, secretly he knows he lacks the brainpower to make a good deal. He is not actually a deal-maker but even a good deal-maker would suspect the Chinese are going to outsmart him. And then critics, even GOP-party favoring critics, will pounce on his errors and point out all the ways in which a Trump-China deal is a bad deal. But at the same time, his advisors have been telling him that trade war with China is a primary factor that drove the stock market down. And he equates the stock market performance with a judgement on his own performance. What to do?

Based on past performance, Trump will make a deal but in short order call the Chinese cheaters (which will likely be true) and thus pull out at least in part and/or call for new talks. We will not be rid of the China trade war until after the next presidential election in 2020. It's too powerful a tool for Trump, on a par with anti-immigrant rantings and lies. He cannot give up this addiction.

Besides, the China trade war keeps his name in the spotlight. Without it, his name might be on the front page for crimes and misdemeanors. As numerous pundits point out, he thinks he is running a reality tv show, not a country. If we keep looking for how he will try to captivate and engage the audience, we will know his "policy" choices.

But there is a third show-grabber—another tax cut, this time affecting the working and middle class. Of the three biggies—immigration, China trade war and tax cut—we have to ask whether a new tax cut outweighs China. Economically, no. But with contraction or recession looming, he will feel "smart" making the tax cut proposal. For all we know, it might work, too, at least briefly.

Outlook:

The only data we get today, unless you count the Baker Hughes rig count, is CPI. It is expected to dip to 1.9%, dragged down from 2.2% in Nov by soft energy prices. Core CPI will likely remain the same at 2.2%. If the oil price rally persists, by this time next month the Dec headline data will show a spike due to oil, possibly offset by the government shutdown. We see various estimates of how much GDP gets lost because of the shutdown.

And we really can't afford to lose a drop of momentum. According to the monthly WSJ survey, economists see a "25% chance of a recession in the next year, the highest level since October 2011. The probability was just 13% a year ago.... Just over two-thirds of the economists said U.S. growth is somewhat or very exposed to a slowdown in other major economies such as China, Europe and Japan. Forecasters are even more concerned about the outlook for 2020. More than half of the economists, 56.6%, said they expected a recession to start in 2020, a presidential election year, while another 26.4% of those surveyed expect a recession in 2021."

Nobody can name a specific trigger. All our woes are bundled together and intertwined—but led by US trade talks and China, or trade talks with China. In other words, blame Trump. Even if we don't get an outright recession, we will get a slowdown, likely to 2.2% this year from 2.4% predicted only in October. By 2020, growth will slow to 1.7%. The WSJ notes the Fed has higher numbers, 2.3% in 2019 and 2.0% in 2020. The white House wants at least 3%, of course.

For what it's worth, the Atlanta Fed still has 2.8% for Q4 2018. The New York Fed has 2.49% for Q4, and 2.14% for Q1 2019. JP Morgan forecasts Q1 at 2% from an earlier forecast of 2.25% because of the shutdown. There is nothing here to suggest the dollar should get on a recovery path. When really bad manufacturing output data from Europe do not dent the euro's rise, you know the normal asymmetrical treatment of the dollar is in play.

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 free trial, please write to [email protected] and you will be added to the mailing list..