Outlook:
The "Phase 1" trade deal is not a deal. Trump claims China will buy $50 billion in farm goods in return for the US not raising tariffs this week from 25% to 30% but leaving the December tariff hikes in place. There are some tech sector issues in there, too, about which we have no information. But the farm deal as shown is a terrible deal for everyone, not least because if China were to buy $50 billion in farm goods, that would be to double the level from 2014. See the chart from Bloomberg. Is that even possible? It seems likely someone is lying.
More importantly, if details get written down and something does get signed, it's still only Phase 1. It's simply not enough to restore animal spirits to capital investment and to investors. The reduction in perception of risk is tiny. Capital investment is the engine of growth, and thus whatever the household spending and mood may be telling us about the short term, longer run, we need that capital investment. Like all politicians, Trump may feel that will be the next guy's problem. He just wants to make it to the finish line, which is Nov 2020. The economy can fall apart after that.
The unhappy deduction is that both China and Trump are happy to drag things out. The good news is that Big Bank analysts are not buying the story. Whether this has any effect on equities—Trump's idea of ratings--remains to be seen. Big knee-jerk gains last Friday are being followed by a drop in equity index futures so far this morning. The WSJ says straight out "global stocks fall on trade uncertainty." The IMF is almost certain to deliver a drop in global GDP forecasts later this week.
In a word, the US-China trade deal is a big, fat failure.
The Fed can see the handwriting on the wall, too. Acres of newsprint are being wasted trying to figure out whether it cuts in Oct or in Dec or both. The failure to get a trade deal implies at least one cut. The Chicago Mercantile Exchange "FedWatch Tool" shows 58.9% believe in one cut (but it was 41.4% a month ago) and 24.5% believe in two cuts (from 12.8% a month ago). Only 16.6% of traders think rates will be the same after the Dec 11 Fed policy meeting.
It doesn't matter that Fed funds traders have a lousy track record in predicting actual outcomes. These numbers alone influence others, not excluding Fed board members.
You'd think the persistence of uncertainty and risk-off attitudes would restore the dollar to its uptrend, but so far that's not happening. The prospect of rate cuts "should" not be strong enough to drive the dollar down, because after all is said and done, the US still has a growth advantage and a yield advantage. So we can't identify the train of thought at work today, and perhaps it won't last, but for the moment, those chart breakouts need to be respected.
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