‘This Trade War Has Been Personalized’: One Bank Frets Over ‘Totally Unexpected’ Escalations

If Donald Trump was trying to shock analysts who had otherwise adopted an optimistic outlook for the global economy on the assumption that a full-blown trade war between the US and China was off the table, he has succeeded – “big league.”

Hindsight is always 20/20, but in retrospect, it was probably a mistake to assume that we’d all heard the last of the trade war with China.

While Trump seemed keen on engineering another leg higher for US equities with the announcement of a deal, and while the president has variously touted the enormity of what he appeared to be on the verge of accomplishing, he’s notoriously temperamental. House Democrats have bombarded the White House and Trump associates with subpoenas and document requests and Trump is facing at least three vexing foreign policy quandaries (Iran, North Korea and Venezuela).

Although last weekend’s tariff tweets were apparently a response to Beijing striking language from a draft trade agreement (a move that indicated China was not open to changing its laws), it’s not at all far-fetched to suggest that Trump was taking out unrelated frustrations on Xi.

Whatever the case, here we are, headed into the second week of a new phase in the Sino-US spat, and if you ask Credit Suisse, this “was totally unexpected just one week ago.”

“This trade war has been personalized by the two strong-willed leaders [and] their actions are likely to be based on political calculations as much as economic logic”, the bank’s James Sweeney writes, in a note dated Friday. “We must approach our analysis with humility and not assume that we can predict their decisions and the exact timing”, he adds.

Sweeney’s tone in demonstrably cautious. He “tentatively” cuts his GDP forecasts for this year by 20bps and notes the inflation should be a bit higher in the near-term. He’s encouraged that we’re still “far from” a scenario that might presage a “recessionary shock”, but the outlook is darkening.

After warning that the market reaction so far is not large in the grand scheme of things and has the potential to get worse the longer this drags on, Sweeney writes that “the first serious non-market bad news would likely come in survey data [and] we think the ISM would plunge into the 40s in June if tariffs remain in place.”

Of course, there is already a disconnect between the ISM and US stocks (top pane below), so any further deviation would only make the case stronger for a “catch down” in equities.

“Policymakers are highly sensitive to PMI surveys, and Fed cuts would become increasingly likely if ISM plunges amid volatile markets”, Credit Suisse goes on to write, before describing how the dominoes would tip once PMIs start rolling over in earnest. To wit:

As tariffs persist, businesses which import goods from China will experience a combination of margin pressure and weak sales, which will be different depending on the microeconomics of each product market. Sellers who speculate that tariffs will be temporary might not shift prices. And for buyers, if tariffs might go away soon, why buy now? Investment orders and industrial production data should reflect this worrying dynamic as bottlenecks disrupt some supply chains. It might take a few months for the magnitude of this shock to register. Even if the tariffs are gone by then, the lagged impact of the episode should filter through the numbers. Labor markets in the US might become affected if risk aversion persists and margin pressures drag business investment lower. This might take months to develop. Labor market trends are not always significantly correlated to trade and goods sector activity. However, recession risks would rise significantly if a jobs market slowdown occurred. 

Sweeney tempers that assessment with a number of caveats, but the implication is clear: We’re wading into perilous waters and Trump is tempting the economic and market gods.

Credit Suisse goes on to say that they “would expect a deal sooner rather than later given the political nature of the shock”, but the bank warns that “investors should be ‘trade war gaming’ a range of scenarios based on these dynamics above.”

For now, we’ll just leave you with two videos, more for the sake of humor than anything else.

First is Trump’s “grandaddy of them all” characterization of the now scuttled deal, as communicated to the world during the last photo op with Chinese Vice Premier Liu He in early April.

And finally, who can forget Trump’s take on what would happen to stocks once the “massive deal” is done?