It’s Thursday, which means today’s Donald Trump gets to look the Donald Trump who refused to shake Angela Merkel’s hand square in the eyes and say “hold my beer.”
Chinese President Xi Jinping (also known as the most important person on the planet) will visit Trump at the President’s Mar-a-Lago club in Florida (where else, right?) today and we imagine Xi is really, really looking forward to this…
If you know anything about Xi it’s hard to believe he would even entertain the idea of meeting Trump, but we’re glad he decided to indulge us because this is almost sure to be a debacle. The only question is whether America will be privy to what actually gets discussed or whether all we’ll see are the pictures of dinner.
To be sure, Trump is no stranger to meeting world leaders he’s previously insulted, but his attacks on China have been especially vociferous. And Xi isn’t exactly Angela Merkel. That is, he’s not a guy who’s prone to letting sh*t slide, although outwardly, you wouldn’t be able to distinguish him from a wax figure as the expression on his face is always frozen in a kind of skeptical smirk (see above). Here’s a bit of color from Goldman that should help to frame things:
Markets are focused on the meeting this Thursday and Friday between US President Trump and Chinese President Xi, which stands as a key event in a vital global bilateral relationship—between the two countries that represent the world’s two largest economies and two largest militaries. The meeting will mark the start of a new US-China dialogue but, in our view, the probability of significant breakthroughs seems low in light of the still-evolving nature of the Trump Administration’s policy toward China and the limited amount of interaction to date. Indeed, comments from senior officials at a White House press briefing [held earlier this week] described it as an “introductory meeting” and an opportunity to “set a framework for discussions on trade and investment”, and indicated that “President Trump really views this meeting as a first step”.
President Trump has signaled a desire to fundamentally shift aspects of the relationship, particularly regarding economic and trade-related issues. Chinese policy has become increasingly assertive, both economically and geopolitically, but in light of upcoming leadership changes ahead of this autumn’s 19th Party Congress, President Xi is apt to be keen to preserve aspects of the status quo and avoid disruptive changes.
This meeting is also notable for its timing, as it comes much earlier than comparable US-China meetings in new administrations, which have tended to occur in the fall of the inaugural year; in the last three US administrations, the initial meetings occurred in November 1993, October 2001, and November 2009, for example. Unlike some of these prior meetings, at this early stage the Trump Administration’s policy approach on China is not entirely clear, and some important officials, like the US Ambassador to China Terry Branstad and US Trade Representative Robert Lighthizer, still await Senate confirmation. (From the Chinese perspective this may be an attraction of the early meeting date, giving President Xi and his team the chance to influence the new administration’s policy before its direction is fully set.) Nevertheless, the White House has opted to hold this “very difficult” meeting, as President Trump described it, and has held out the possibility that “something dramatic” could be achieved.
Whatever. The only question here is how awkward the photo ops will be. Here’s Jacques deLisle, who teaches Chinese law and politics at the University of Pennsylvania Law School, to explain how low the bar has been set:
They should be happy if they get something fairly symbolic. Now, is that a real big victory? No. But I think the victory for everybody is to keep the relationship from going off the rails.
Indeed that’s all we can hope for with any meeting between Trump and another world leader – “just keep the relationship from going off the rails.”
Who knows, maybe Peter Navarro will give Xi a signed copy of “Death By China.”
Meanwhile, there were some FX fireworks overnight as we documented earlier this morning. “We have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook,” Mario Draghi said in Frankfurt, and that led directly to this:
Markets are of course still trying to sort out the Fed Minutes which, once the machines had time to parse the headlines, sent yields, the dollar, and stocks tumbling. All eyes are on the 10Y to see if it can manage to sell-off or whether (possible) Asian buying and/or covering in the last vestiges of the spec 10Y short keep things looking decidedly not reflationary…
Here’s some color on that from SocGen out this morning:
The focus of FOMC Minutes was on when/how to start the process of reducing the Fed’s balance sheet. There was nothing to change the view that 2017 will see three rate hikes, but if rate hikes happen concurrently with a shrinking Fed balance sheet, that may have an impact on the terminal Funds rate. 1yr rates in 5 years’ time are now priced at 2.55%, 30bp below their highs for the year and the sense is that the Fed isn’t that bothered about a market which prices a lower terminal rate than the ‘dot-plot’ suggests. This matters for two reasons. Firstly, what matters for the dollar now that the rate-hiking cycle is underway is not how many hikes we get this year (or next) but where the Fed’s going in the longer run. And secondly, it’s important for the path of longer-dated Treasury yields. The dollar gets not help from the Fed if we’re collectively tempted to revise terminal Funds down rather than up. And with 10s still flirting furiously with the bottom of their 4-month range, the danger of a break lower’s clear.
The most immediate direct impact of this is on USD/JPY. If I’m a long-standing long-term USD/JPY bull, then I’m a short-term rabbit. 110 won’t hold if 2.20 breaks in 10s and nor will 109, and so on…
The wider Fed debate is about the impact on risk assets of shrinking the balance sheet. If near-zero rates and central bank buying of bonds have been the fundamental driver of global capital towards higher-yielding assets, then reversing both parts of this can’t be helpful. Which is how markets have reacted overnight. The caveat though, is that the FOMC Minutes got to great pains to stress that any move will be gradual and predictable, and accomplished mainly by phasing out reinvestment of maturing bonds. If I weigh a low terminal Funds rate against a super-cautious and very drawn-out normalisation of the Fed’s balance sheet, I can’t really see reason to worry about crowding-out of capital from emerging markets. I still worry much more about over-accommodative policy and ever-rising debt. So, a risk wobble today but no change in trend.
Asian markets were lower across the board with the Nikkei under pressure from the surging yen, but there was one amusing exception: China. Where, going into today’s Trump/Xi pow wow, the SHCOMP is riding high:
Here’s a snapshot across regional equity markets:
- Nikkei down 1.4% to 18,597.06
- Topix down 1.6% to 1,480.18
- Hang Seng Index down 0.5% to 24,273.72
- Shanghai Composite up 0.3% to 3,281.01
- Sensex down 0.4% to 29,865.57
- Australia S&P/ASX 200 down 0.3% to 5,856.29
- Kospi down 0.4% to 2,152.75
- FTSE 7306.41 -25.27 -0.34%
- DAX 12192.11 -25.43 -0.21%
- CAC 5100.72 8.87 0.17%
- IBEX 35 10447.30 44.60 0.43%
Oil’s rally is of course being constrained by record US production and ever rising inventories. “U.S. output is a headwind as it continues to rise and that’s stopping the price from extending gains,” David Lennox, a Sydney-based resource analyst at Fat Prophets said Thursday adding that “the OPEC cuts are preventing oil from sinking to $45.”
As for gold, a new survey of traders and analysts conducted by Bloomberg suggests most are still bullish on the outlook for prices.
Here’s the data docket in the US:
- 7:30am: Challenger Job Cuts YoY, prior -40.0%
- 8:30am: Initial Jobless Claims, est. 250,000, prior 258,000
- 8:30am: Continuing Claims, est. 2.03m, prior 2.05m
- 9:45am: Bloomberg Consumer Comfort, prior 49.7