These kinds of posts are almost too easy to write, which is why I don’t do a whole lot of them, despite the fact that they’re always popular.
Much of the debate around the expected 25bp rate cut from the Fed at the end of this month revolves around the lack of a clear economic rationale in the US. The June payrolls report complicated things further in that regard. As Goldman laid out Monday, the case for “insurance” cuts right now is best made not by reference to the US economy (which is still performing reasonably well), but rather by way of discussing the possible implications for financial conditions if the Fed disappoints.
Read more: Goldman Asks: ‘Why Cut?’
But if Jerome Powell could speak frankly – if he could, to use his own vernacular, employ “plain English” – he might easily justify preemptive rate cuts by simply pointing to the presidential Twitter feed and referencing what’s going on abroad, on the way to asserting (loudly) “This guy’s crazy and the world’ on fire”.
That wouldn’t necessarily be hyperbole.
Take Tuesday morning for instance. Donald Trump took his war of words with the UK up another dozen or so notches, tweeting the following at 7:48 AM:
The wacky Ambassador that the U.K. foisted upon the United States is not someone we are thrilled with, a very stupid guy. He should speak to his country, and Prime Minister May, about their failed Brexit negotiation, and not be upset with my criticism of how badly it was……handled. I told @theresa_may how to do that deal, but she went her own foolish way-was unable to get it done. A disaster! I don’t know the Ambassador but have been told he is a pompous fool. Tell him the USA now has the best Economy & Military anywhere in the World, by far…….and they are both only getting bigger, better and stronger…..Thank you, Mr. President!
That is, objectively speaking, insane. But what’s even more insane is that America is so numb to this kind of thing that Trump’s diatribe wasn’t even close to headline news on Tuesday. Rather, it’s “just Trump being Trump” or, just Trump reacting as you’d expect him to react when he learns that foreign diplomats called a spade a spade when they got an up close look at his administration. And, as if calling the UK ambassador a “very stupid, wacky pompous fool” wasn’t enough, Trump somehow managed to work in a boast about the US military on the way to demanding that Americans “thank” him for doing his job.
This goes without saying, but here it is anyway: There is no telling what he’ll say tomorrow and it’s
probably definitely not a stretch to suggest that we’re hours, days or, at best, weeks away from the president calling off the trade truce with China.
In fact, less than an hour after insulting Britain (and about a half hour after promising he’ll fight to preserve Americans’ right to say the Pledge of Allegiance, which is apparently under siege in “the great state of Minnesota”), Trump lashed out at India, claiming New Delhi “has long had a field day putting Tariffs on American products”, something he insists is “No longer acceptable!” (More on the India spat here.)
All “crazy like a fox” and “3-D chess” theories aside, a simple read on this situation is that Trump will wake up one morning in a bad mood and move forward with tariffs on the remainder of Chinese goods. Because the comment period has come and gone, he can implement those duties quickly if he chooses.
Just take a moment to step back and think about how schizophrenic the trade charade has really been over the past 14 months. Here’s a handy guide from Credit Suisse:
Of course, that kind of unpredictability is contributing to rampant global uncertainty which, in turn, has exacerbated what is now a worldwide manufacturing slump. The deteriorating backdrop has lit a fire under central banks, but there are legitimate questions about their capacity to reflate given limited “ammo”.
“Central banks are in the driver’s seat for risk assets now [and] fundamentals are taking a back seat, as has often been the case. Yet on this front, data surprise continues to be downbeat and worthy of note”, BofA’s Barnaby Martin wrote late last week, adding that “the global data surprise index has now been negative for over 300 consecutive days”. That, folks, is the longest stretch on record.
As if it weren’t enough that developed market central banks are confronting this situation with rates barely off the lower bound at best, and still mired in NIRP at worst (and with balance sheets still bloated), Trump is deliberately knee-capping the engine of global growth, trade and, crucially, credit creation (i.e., China).
One read is that the more pressure Washington puts on Beijing, the “better” as the pressure for Xi to deploy kitchen-sink-style stimulus will grow, but as BofA’s Martin notes, describing the visual in the right pane above, “the growth in China’s credit impulse has been a lot slower this time around”. It’s also not clear how effective Chinese stimulus will be when it comes to boosting growth abroad – thus far, Beijing’s stimulus measures have been inwardly-focused.
Credit Suisse underscores how pernicious all of this really is. “Before the [May 5 tweets announcing an end to the Buenos Aires ceasefire] global IP growth was bouncing off a March low”, the bank writes, in a new outlook piece.
Now, though, things are likely to decelerate anew, for all of the reasons cited above. “We expect another sharp downturn in activity from June, due to uncertainty related to the new Chinese tariffs, temporary fears of tariffs on Mexico, ongoing fear of tariffs on autos, and growing fear of tariffs that seem to casual observers to appear as sudden random events, as with the recent India dispute”, the bank goes on to say.
So, if Powell is looking for a simple excuse when it comes to explaining a predisposition to get out ahead of God only knows what’s coming down the pike, he might just say he’s utterly bewildered by the current administration’s foreign and trade policies, on the way to suggesting that the global economy is likely closer to being fed up with it all than anyone realizes.
The irony is that Trump would be just fine with his Fed chair saying that if it leads to rate cuts. Indeed, it was the president who, on December 17, offered the following not-at-all alarming assessment of monetary policy and global affairs:
It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!
Burn baby, burn.