Exactly a week ago, Barclays joined JPMorgan in forecasting Fed cuts amid an unexpected escalation in the trade war – namely, Donald Trump’s decision to threaten tariffs on Mexico.
Both JPMorgan’s Michael Feroli and Barclays’ Michael Gapen cited the Mexico threat in their calls. “Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response”, Feroli wrote. “The expansion of tariffs to Mexico after already negotiating a revised USMCA to replace NAFTA represents an important development”, Gapen said.
Fast forward a week and, in the wake of a “big league” miss on May payrolls, Gapen is now pulling forward his call, citing “May’s weakness in services sector employment” which, if sustained, could “signal that weakness in the trade-sensitive manufacturing sector is spilling into the broader US economy”. He also says it’s at least possible that the Fed could go ahead with a preemptive cut this month. “FOMC members may believe that precautionary cuts are warranted at their meeting on June 18-19”, Gapen writes, adding that “given the mostly precautionary motivation, there is some logic to accelerating the timeline of cuts to forestall downside risks, especially given the limited amount of space for future cuts to the policy rate if a downturn materializes.”
For what it’s worth, Goldman still hadn’t thrown in the towel and adopted cuts as their base line as of Friday afternoon. BofA cited the jobs report as further evidence to back up their call (from Tuesday) and Credit Suisse says the case is now even stronger for July (the bank had already called for a July cut).
At the same time, Trump teased progress with Mexico. Perhaps he’s in the early stages of implementing his “crazy like a fox” plan. As the rate cut speculation went into overdrive following the payrolls report, he took to Twitter to preview a potential deal that averts tariffs.
“If we are able to make the deal with Mexico, and there is a good chance that we will, they will begin purchasing Farm and Agricultural products at very high levels, starting immediately”, the president tweeted. US stocks were on track for their best week since November.
We may have been duped!
On Friday morning, Nomura’s Charlie McElligott asked what might happen to crowded Fed cut bets in the event this is all a scam and Trump is just angling to engineer the easing he wants on the way to calling off the trade war once the Fed has pulled the trigger.
Hours later (and in the same vein), Bloomberg’s Cameron Crise observed that “while Barclays call for a 50bp Fed cut next month has helped propel the August Fed funds contract to fresh heights, suddenly much of the rest of the short end doesn’t look so hot”. “It’s almost a cliche these days that eurodollars are psycho bid, but the reds have erased their gains on the day”, he added, before proceeding to pose the following question: “If the strip can’t hold a bid on legitimately weak economic news, what’s it gonna do when there’s strong data or if (or should we say when) stocks reach new highs?”
Suffice to say that if Trump ends up getting the Fed to pre-commit to July, then proceeds to cite a G20 chat with Xi as a reason to call off the next round of tariffs on China, stocks will almost assuredly surge to new records.
Meanwhile, according to a schedule posted to the Fed’s website, Jerome Powell spoke to Trump over the phone on April 11, at 9 PM.
The call lasted “for about 5 minutes”.