The markets are not exactly indifferent to the trade war, but not panicking

Outlook:

Today the only economic release of any potential muscle today is JOLTS, but we also get speeches from Powell and two regional Feds. Tomorrow will bring UK and US inflation. The US CPI for Jan is expected up 1.5% y/y and core, 2.1%. The WSJ notes that some consumer prices are already showing a lift, including food.

We made a mistake yesterday in saying the FX market is relatively indifferent to the US-China trade war, as least with respect to the US and eurozone. We should have stopped at "the US." The trade war, if it escalates, will affect eurozone economies more than the US. Trade is a bigger component of GDP in the eurozone and the Chinese slowdown is already affecting demand for European exports. The US can weather a full-bore trade war more readily than Europe, or other Asian countries.
But it's also true that despite numerous scare stories about the awful effects a 25% tariff could bring (offset by a small number of happy stories, like US steel), the markets simply don't believe Trump will go through with it. If they did, presumably we'd have flight-to-safety up the wazoo—yields at 4%, or something. Forecasts would abound of a Fed rate cut in Q2, and we don't have that, either.
The markets are not exactly indifferent to the trade war, but not panicking, either. We keep worrying that they should be panicking, but perhaps there is some "wisdom of the crowd" going on here. Put "we're all right, Jack" in one tail of the distribution curve and total meltdown/global recession in the other tail, and the midpoint remains a forecast of relatively normal conditions. We can go back to wondering whether a late-cycle maintenance level is achievable this time.
We have been saying that making concessions and compromises is not Trump's style. He thinks giving an inch is a sign of weakness. But perhaps others are persuading him not to be the bull in the china shop, or they are making deals behind his back designed in such a way that he doesn‘t dare deny them. We know probably 0.01% of what is actually going on. We think because Trump says one of two big things that everything will be Big. But consider Nafta. That was Big Talk but not a whole lot of change in the end, at least not a lot that was catastrophic. And now the US government is suing OPEC, a cute sideline story but a suggestion that maybe Trump is tired of China already and prepared to move on to some other awful initiative. The Wall, and N. Korea and Iran may have gone as far as they can... so maybe Trump is cooking up a new crisis, one that won't endanger the stock market.
If we consider that Trump started campaigning for 2020 on his first day, we need to search for the themes that are coming into focus. So far we have climate change, raising taxes on the rich (and even taxing wealth itself) and various form of "socialism" coming from the left (which risk shooting itself in the foot). Trump is the least qualified of persons to debate "socialism" but never mind. Keep an eye peeled for the Next Manufactured Crisis. It may not be China.
If it's not a China showdown, does that mean the dollar retreats and yields fall back again? And along the same line, the yen weakens? Maybe. The dollar run is overly long.

Tidbit: Trump went to El Paso last evening and held a rally for the Wall that the fire department estimated was 6500 indoors and another 10-12,000 outside. Trump lied about the crowd size, naturally, saying it was 35,000. Meanwhile, likely presidential contender Beto O'Route held an anti-Wall rally that brought 7000 indoors and 10-15,000 outdoors, again according to the El Peso Fire Dept. Trump lied about that, too, saying he might have had 200-300. (Data from Newsweek.) Trump seems to think that crowd size is like TV ratings, forgetting a few things, including that Clinton had 3 million more popular votes than he did, and also that his lie about his inauguration being bigger than Obama's is still a cause of derision.
Survey show the majority of US voters of both parties do not want more Wall. Other surveys show a majority of voters of both parties do favor gun control and do favor allowing abortion. Congress declines to obey the popular will on these issues. In the UK, Parliament refuses to accept a Brexit deal—any Brexit deal—despite a referendum of the voters favoring Brexit. Funny, it's places like Italy and Hungary that are more obedient to the will of the people.

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