In the first half of the week, markets got a welcome reprieve from the incessant trade war headlines, but not because the Trump administration took steps to deescalate the situation.
Other than Larry Kudlow’s suggestion that there could be some kind of breakthrough in the cards when European Commission President Jean-Claude Juncker comes to Washington next week to talk shop, there’s no sign of a light at the end of this tunnel. If anything, everyone is more in the dark on trade this week than they were last week.
Rather, the worsening trade conflict has simply taken a backseat in the U.S. to a more pressing domestic political concern: the fact that the President of the United States is tying himself in rhetorical knots trying to explain what exactly it is he believes when it comes to the U.S. intelligence community’s assessment of Russian meddling in the 2016 election.
The debacle in Helsinki triggered a furious backlash from both sides of the aisle in Washington and the White House, already in damage control mode after the President’s disastrous performance Brussels and equally calamitous trip to the U.K., is now careening from one Trump soundbite to the next in an ultimately futile attempt to keep track of his lies.
Assuming all of this dies down (and it may not), everyone will be right back to focusing on the trade issue and on Tuesday, Orrin Hatch made it clear that if the administration continues to push the envelope on tariffs, Congress will act to curtail his authority when it comes to trade.
For his part, Fed Chair Jerome Powell was reluctant to discuss the subject in his testimony on Capitol Hill this week, but ultimately, it was unavoidable. Here’s what Powell said in the second day of testimony (i.e., to the House):
Reports also suggest the administration is now thinking about slapping tariffs on uranium imports using the same “national security” excuse trotted out to justify the metals tariffs and the prospective duties on cars.
Meanwhile, China has gone to the WTO in an effort to try and get some help with this, but that will of course be an exercise in abject futility because after all, Trump wants to abandon the WTO too.
All the while, America’s farmers are feeling the heat. Everyone from the Juice Products Association to the US Dairy Export Council to a loose collection of apple growers has come out against the measures.
Oh, and don’t forget about the soybean farmers, because that’s who’s really taking it on the chin. All you can do is say a prayer for those folks. Folks like Bill Beam, a 58-year-old Pennsylvania farmer who spoke to CNBC this week about the dramatic decline in soybean prices that’s accompanied the escalating trade tensions. Here’s what he said:
It’s a lot of money. If I lose $100 an acre, and you take the acres that I farm, it’s a lot of money. And I don’t think there’s anybody that really can say they’re making a lot of money at these prices, if any.
As CNBC notes, the trade war is threatening a family business in Bill’s case. “Beam [has] soybeans on nearly 1,500 acres of a southeastern Pennsylvania farm that his father and grandfather managed before him,” the article details.
But don’t worry Bill, because last week, Steve Mnuchin said he’s “watching soybean prices everyday” for signs of trouble. And yes, he really said that. This was the actual Bloomberg headline from last week:
- MNUCHIN SAYS HE FOLLOWS THE SOYBEAN MARKET ON A DAILY BASIS
That’s absolutely laughable coming from a man whose wife spends her time trolling America’s middle class on Instagram.
As CNBC goes on to write, Rep. Ryan Costello represents Bill’s district and he (Ryan) is on board with the push to pass legislation that would rein Trump in. Here’s a quote from Costello:
This legislation would uphold Congress’ Article I authority regarding trade. It would send a strong signal to Pennsylvania workers and families that Congress is committed to supporting American jobs and a strong economy,” Costello said in a statement earlier this month.
And wouldn’t you know it, good old Bill Beam, third generation farmer, voted for Trump. He’s apparently holding out hope that his fellow farmers can store some of their harvest to try and ride out the storm, but that strategy isn’t viable forever, he said.
You’ve still got to pay your bills eventually, so that’s a challenge.
It sure is, Bill. Maybe next time you’ll reconsider before buying into the absurd narrative that a billionaire real estate mogul who has never in his life demonstrated that he cares about everyday people is suddenly a champion of the American farmer.
So what happens next? Well, no one has any idea, but the major banks are trying their best to assign probabilities. You can read some excerpts from Deutsche Bank’s take here and from Goldman’s assessment here, for instance.
On Wednesday, BNP was out with a lengthy assessment of their own and while all of this is guesswork (at best), it’s still worth excerpting the scenario analysis along with the accompanying visual if for no other reason than it helps everyone keep track of a situation that is spiraling rapidly out of control.
Take it for what it’s worth.
Scenario one – probability of 20%: no further escalation In this scenario, the US would reach deals with both China and the EU, as well as seal a new NAFTA agreement with Canada and Mexico. While tensions might persist in the short term, there should be a rebound in business sentiment and investment growth, together with a return to a risk-on mood in the markets.
Scenario two – probability of 60%: further escalation. Our base case is still for piecemeal protectionism, but we now assume that this will come with additional tariffs on Chinese imports, as well as car tariffs. Global growth would be likely to slow further, as tariffs and related uncertainty would hit consumption, global trade and investment. NAFTA would remain in place, but with negotiations extended into 2019. Tariffs should first boost prices before a demand slowdown kicks in. As most economies are at full capacity or even beyond, we see risks of a more enduring inflationary impact. Under this scenario, we continue to expect both the US Federal Reserve and the European Central Bank to carry on their gradual monetary policy normalisation. Conversely, Chinese authorities are likely to respond to downward pressure on growth with growth-supportive measures, including a marginal easing in monetary policy.
Scenario three – probability of 20%: full-blown global trade war. We would expect this to lead to a global recession.