War And (No) Peace: Full Week Ahead Preview

If you were worried about an imminent escalation in the Syria conflict after the Bashar al-Assad regime decided now was as “good” a time as any to gas some folks again, don’t worry because it’s not like Donald Trump is being advised by notorious war hawk, staunch defender of the Iraq war, Fox News contributor, and man whose mustache is out of fucking control, John Bolton.

Oh, wait…

Yeah, we’re all gonna to die.

"Bolton to lead discussion on Syria options"

omg we're all going to die.

— Heisenberg Report (@heisenbergrpt) April 8, 2018

No, but seriously, this is bad news because what’s likely to happen here is that Bolton is going to use this as an opportunity to rekindle America’s interventionist approach to Mideast policy at a time when relations between Washington and Tehran are already deteriorating rapidly. That’s not to say some kind of response from the Western powers isn’t appropriate, it’s just to say that whatever that response should be, you don’t want John Bolton to be the guy calling the shots.

So just in case the geopolitical situation needed to get a little more fraught against a backdrop that’s seen the trade war rhetoric ratcheted up to a veritable fever pitch, you can throw “possible U.S. strike on Assad regime” into the mix.

Trade tensions will obviously be in focus again and over the weekend, Trump assured everyone that no matter what happens, he and Xi are “still friends” – and yes, he actually said that:

President Xi and I will always be friends, no matter what happens with our dispute on trade. China will take down its Trade Barriers because it is the right thing to do. Taxes will become Reciprocal & a deal will be made on Intellectual Property. Great future for both countries!

— Donald J. Trump (@realDonaldTrump) April 8, 2018

Something tells me Xi doesn’t think of Trump as a “friend”, but who knows. After all, they did share a giant piece of chocolate cake at Mar-a-Lago a year ago and ironically, Trump claims it was during that desert when he informed Xi that he was launching tomahawk missiles at Syria in response to the Assad regime’s last chemical attack on civilians. If you recall, that piece of cake was, according to Trump’s estimates, about yea bigly…

For the most part, Wall Street is sticking with the idea that the trade war banter is just political posturing from Trump, but with each passing escalation, the reality seems to be setting in that the President might not know what he’s doing and could thus be setting the stage for a “miscalculation” on the part of America’s trade partners including and especially China. Here’s Barclays:

The headlines may be ominous, but the trade story is evolving in line with our expectations that tariffs are being used as a negotiating tactic and that the eventual outcome will not be a significantly disruptive one. Neither the US nor China has set a definitive date for when its tariffs will go into effect, while US officials have communicated a desire to speak with their Chinese counterparts, indicating that there remains a great deal of flexibility. The resolution to current situation may even result in freer trade if it addresses other countries’ complaints about China’s policies towards protectionism and intellectual property.

Fingers crossed.

As Goldman reminds you, Trump’s “strategy” is fool’s errand and in the event Beijing feels like America is cornering them by introducing tariffs which exceed China’s capacity to respond, Xi could be forced to retaliate via the currency or else by selling Treasuries, two options that could roil global markets. Here’s GS:

Reducing a bilateral deficit, e.g. vs. China, is not difficult. After all, retaliatory trade restrictions are limited by the fact that the US only exports about $150bn of goods to China but imports more than $500bn. But China can retaliate in other ways, e.g. by reducing US Treasury bond holdings or restricting services trade and market access for US companies. Moreover, the bilateral deficit has little economic significance, especially because much of it reflects re-exports of goods assembled but not produced in China.

Trump doesn’t care about logic though – presumably, he actually believes that he can “win” by simply slapping enough tariffs on China to make a proportionate response mathematically impossible. It’s all about “bigly” numbers:

It’s with all of this in mind that market participants will try and digest a raft of data from China this week including CPI, PPI, the trade balance, new RMB loans and TSF. To the extent those numbers are always watched closely, they’ll now be scrutinized even further.

“Our economists anticipate Chinese CPI will ease to 2.3% yoy in March with a likely moderation in overall food price inflation,” BofAML writes, previewing the data. Don’t forget that food inflation is a hot topic in light of the possible implications from the soybean tariffs.

BofAML goes on to predict new bank loans rising to RMB 1,150bn and for M2 growth to increase slightly to 9.0% yoy (easier comp there). Here’s their quick preview of the trade data:

We expect headline export growth (in USD terms) to moderate to 8.3% yoy in March from 44.5% yoy in February, partly reflecting one fewer working day this March compared to a year ago and an unfavorable base effect. Given we forecast import growth in March at 14.5% yoy, the implied trade surplus is at US$14.7bn in March compared to US$33.8bn in February.

Stateside, we’ll get the March Fed minutes. As I mentioned elsewhere this weekend, these will be parsed pretty closely for any mention of trade concerns, especially in light of what Jerome Powell didn’t say on Friday at his speech in Chicago. Additionally, traders will be looking closely for any further color in the Minutes about the upward revision to the near- and medium-term growth path in the SEP versus the unchanged longer-term outlook. Also, folks will probably be looking for some further color on the projected moderate inflation overshoot tipped in the March SEP. Speaking of inflation, CPI is on deck in the U.S. as well and this will all be considered in light of March payrolls which were an abysmal disappointment on the headline. AHE was in line with consensus, which kind of leaves us in limbo as far as the status of “Goldilocks” and, by extension, the remnants of the low vol. regime. Here are Goldman’s CPI estimates along with consensus on CPI:

CPI (mom), March (GS -0.09%, consensus flat, last +0.2%). Core CPI (mom), March (GS +0.13%, consensus +0.2%, last +0.2%). CPI (yoy), March (GS +2.28%, consensus +2.4%, last +2.2%). Core CPI (yoy), March (GS +2.06%, consensus +2.1%, last +1.8%)

We’ll get ECB minutes too, and I suppose this could be some semblance of interesting considering Draghi dropped the dovish APP language at the last meeting. As a reminder, the sooner APP is wound down completely (reinvestments notwithstanding), the sooner the hikes can commence, so depending on the internal discussion about the language tweak at the March meeting, it might be possible to divine something about the likely timing of the first hike.

There are central bank speakers galore this week, although one certainly imagines that headline risk stems not from monetary policymakers but rather from Trump’s Twitter feed which will of course be watched not only for trade war and shooting war news, but also for Amazon broadsides (his WaPo tirade on Sunday seems to suggest Bezos is going to be hearing more from @realDonaldTrump in the days ahead).

So yeah, “just” all of that. And actually much more.

The full calendar from BofAML is below.

Via BofAML