US-China trade talks are going to dominate, especially after the Fed delivers its work today

The stock market loved the idea of trade talks with China but there is a lot amiss in that story. Each of the important news outlets has it slightly different and it’s clear they each struggled to get accurate info. By our count, Bloomberg was first with the meeting story at 6:38 pm ET last evening. But by 10 pm, when we hang up our spurs, it hadn’t hit the WSJ or FT, implying different stories out of the White House.

This is important because it has long been reported that the White House staff doesn’t communicate well with one another and that’s how Trump likes it, pitting his own team against one another—very bad management style. It’s important also because it discloses that the White House staff is at odds within its ranks, implying the US doesn’t have a set of policy principles or proposals going into the meeting, assuming there is one.

China can easily detect this, even if it’s not spying on the sloppy communications methods rampant in this administration. That means it can dance all around the delegation in Switzerland and show it that it knows what a mess it is, including the lack of actual authority to make a deal. Analysts are at a loss of to predict the outcome. One says a 90-day pause might be possible, while another says a cut to 50% from 145% or even back to 20%. Citi says “The current situation ‘is a lose-lose scenario’; for all involved.” The super-high tariffs are forecast to remain in place for another six to 12 months.

We go with Citi. The US delegation doesn’t know what it’s doing. It almost certainly lacks a clear, specific target. Trump thinks he’s is playing a game. He fails to appreciate the sophistication of the opponent.

The US-China trade talks are going to dominate, especially after the Fed delivers its work today. The bond market is at sixes and sevens over whether prices and yields should go up or down. That means we are also at sea in the FX market.

Yesterday the bond gang was impressed by the tariff-inspired stockpiling and vastly rising imports. Today there is a 10-year auction after Tuesday saw a perfectly normal and good 3-year.

Everyone knows the stockpiling is “management,” not economic growth. Then there is the Fed announcement at 2 pm today, with the press conference to follow. The audience will be triple this time. No one expects a hike or a cut, but we all want hints/suggestions about inflation.

Unfortunately, the brainy Fed economists failed to look out the window during the supply-chain fiasco during Covid and got inflation wrong. Granted, in the long run, the inflation spike was “transitory,” but that’s in the economists’ timeframe (years), not that of the public (months). This time even the savviest of economists can’t tell us the inflation effects of tariffs because Trump can withdraw or triple them literally overnight.

More on capital flight out of the dollar: Stephen Jen and a colleague at Eurizon SLJ issued a paper overnight saying “the dollar may face a $2.5 trillion “avalanche” of selling as Asian countries unwind their stockpile of the world’s reserve currency, according to Bloomberg. Jen is somebody to follow wherever he works.

“Asian exporters and investors may have amassed an ‘extremely large’ pile of dollars through the years, widening the region’s trade surplus with the US… As a US-led trade war deepens, some Asian investors might repatriate chunks of funds or ramp up levels of protection against a weakening dollar — potentially triggering an exodus from the world’s reserve currency.

“’We suspect these dollar hoardings by Asian exporters and institutional investors may be extremely large – possibly on the order of $2.5 trillion or so – and pose sharp downside risks to the dollar vis-à-vis these Asian currencies.’”

Forecast

The euro slipped on the US-China talks story but then recovered about 60 points on the good German factory data. The Fed rate cut has been moved out from June to July (but still with three on the table), while the ECB is expected to cut again in June. At a guess, the US-China talks are a bigger factor than the usual institutional leader, the central banks.

Since that outcome cannot be predicted due to the lack of a policy or plan by the US, we can’t forecast the dollar. We are inclined to go with the capital flight idea and thus more losses, but any ray of light out of Switzerland is going to deliver a boost. Volatility is going to be horrendous. Even the 10-minute traders are going to get hosed. Clean your desk.

Tidbit: The WSJ reports companies are teaming up with high schools to get their shop class students for part-time skilled work (like welding) with job offers upon graduation  of $50-70,000.

Tidbit: In the past 24 hours, we saw two stories about US spying on Greenland. The first one said all spying was called off. The second one said spying is being ramped up as a sign Trump is serious about acquiring it (WSJ). It must be hard to spy on a population of under 100,000 and what is the difference between spying and influencing? Russia would say “none.”

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