Weekend Notables: Trump Calls Xi, Goldman Slashes U.S. Growth Forecast, Fed Call

As is customary, Donald Trump spent Saturday holed up in the White House shrieking into the Twitter void about walls, slat fences, Dems, Witch Hunts, Hoaxes, dead Guatemalan children and star-crossed FBI lovers.

Wedged between a rant about “Presidential Harassment” and a truly unfortunate tweet blaming Democrats for deceased babies, Trump squeezed in the following non sequitur:

Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!

While you’ll be forgiven for doubting whether “big progress” is in fact “being made”, it’s probably safe to assume that a phone call did actually take place, although if you look at the time stamps on Trump’s Saturday tweets, it’s not clear how he fit a “call” with anyone in, let alone “a very long one” with the “King of China“.

The last time Trump tweeted about a “very long, very good” phone chat with Xi, it sparked a fleeting bout of risk-on sentiment, so maybe he’s gunning for a repeat of that after one “well-known investor” advised him to get a deal with Beijing done like, yesterday, if the White House wants the market to stop plunging.

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Trump’s tweet comes amid a series of conciliatory steps undertaken by Beijing in an effort to placate Washington and otherwise demonstrate that China, very much unlike the U.S., is negotiating in good faith.

Next month, a low (or “mid”) level delegation from the U.S. will head to Beijing for talks. Deputy U.S. Trade Rep Jeffrey Gerrish will be in charge of that field trip. David Malpass will be along for the ride, but according to sources, Robert Lighthizer won’t be in attendance.

Is any of this going to matter in terms of avoiding a scenario where the initial 90-day ceasefire expires without a deal? More to the point, is it likely that we’ve seen the end of tariff escalations between the U.S. and China? Not if you ask Goldman, who is out with the 2019 edition of their “10 Questions” series from Hatzius and the economics team.

“We believe tariffs on imports from China are likely to rise somewhat further in 2019, though we also expect that an agreement could be reached by late 2019”, the bank writes, reminding everyone that March 2 is the deadline for avoiding a hike in the tariff rate on the $200 billion in Chinese goods that were taxed at 10% from September 24. That rate goes to 25% in March if there’s no agreement.

“Chinese policymakers appear intent on easing tensions–China has announced purchases of US soybeans, rescinded retaliatory tariffs on US autos, and backed away from the ‘Made in China 2025’ plan–but it is unclear whether this will be enough to satisfy the White House”, Goldman goes on to say, adding that Lighthizer “has stated that March 2 is a ‘hard deadline’ for reaching an agreement and that postponing the [tariff] increase will require a ‘verifiable’ deal that brings about ‘structural change’ and ‘protection of US technology’, which appears to set a high bar.”

Yes, yes it does. And if the petty government shutdown in the U.S. is any indication, Trump is just picking fights for the sake of claiming he’s still fighting, something we have variously warned was likely.

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The hardline stance on trade will become increasingly untenable for Trump if U.S. stocks keep falling and/or if the domestic economy starts to decelerate as the fiscal impulse wanes.

“In the near term, we see little to mitigate the cycle’s acceleration [and] adding insult to injury, the capital markets turmoil potentially gives the Chinese some trade leverage”, Wells Fargo’s Chris Harvey recently wrote, in the course of slashing his 2019 S&P target.

This is poetic justice. Since the trade war really heated up, analysts and pundits have  argued that the ongoing deceleration in the Chinese economy and the bear market in Chinese equities weakened Beijing’s bargaining position. Now, that same logic is being applied to America. Xi’s warnings have finally come to pass — the U.S. cannot hold up in the face of global tumult forever.

Well, in the same Goldman note cited above, the bank meaningfully slashes their 2019 outlook for U.S. growth citing the tightening of financial conditions and persistent weakness in the incoming data.

“We have revised down our US growth forecast for the first half of 2019 from 2.4% to 2% [and] we continue to expect growth of 1¾% in H2,” Hatzius writes, before reiterating that Goldman is still “not particularly worried about a recession.” The bank cites the following three factors for their contention that growth will slow to below 2% (and these are truncated in the interest of brevity on a Saturday):

A slowdown is already evident in the numbers. Both real GDP and our current activity indicator were running at 3½-4% over the summer, but the pace has recently fallen to the 2-2½% range.

The impulses from fiscal policy and financial conditions are turning more negative. In the second half of 2018, fiscal policy contributed nearly ¾pp to growth via lower taxes and higher spending, but this number will gradually diminish to roughly zero by the end of 2019. In addition, financial conditions have turned into a significant headwind and could take more than 1pp off real GDP growth in the first three quarters of 2019.

The economy needs to slow in order to limit the risk of a dangerous overheating down the road. Unemployment is already ¾pp below our 4½% estimate of the rate consistent with a 2% inflation rate in the medium term.

Other notables from Hatzius include Goldman further downgrading their expectations for Fed hikes. The bank calls a Q1 hike “quite unlikely” and while there’s some math assigned to each quarter, the bottom line is that, quote, “these probabilities generate an expected value of 1.2 net hikes in 2019, compared with market pricing of zero hikes.”

(Goldman)

The bank makes no changes to their projections for balance sheet runoff and doesn’t see a broad rethink of the Fed’s strategy in the cards. Goldman’s discussion of that is worth a separate post, which I’ll get around to at some point – maybe Sunday.

In any case, the overarching takeaway here is that the tenuous state of affairs that persisted for the first three quarters of 2018 wherein Fed hikes co-existed with Trump’s trade war and a domestic economy that fired on all cylinders while U.S. stocks soared despite tighter monetary policy and rampant geopolitical uncertainty is no loner tenable.

Something has to give, and it looks increasingly likely that “something” means “everything”, from the Fed throwing in the towel to a marked deceleration in the U.S. economy to Trump finally giving up on the notion that he’s going to rewrite the rules of global trade and commerce.