Donald Trump’s first order of (Twitter) business on Saturday involved perpetuating the administration’s manifestly false narrative on the trade war.
“Things are going along very well with China”, Trump began.
And just like that, the president told his first lie of the weekend. Whatever the opposite of “well” is, that’s how things are “going along” with China.
After that, Trump launched into the usual nonsense about how tariffs work. “They are paying us Tens of Billions of Dollars, made possible by their monetary devaluations and pumping in massive amounts of cash to keep their system going”, the president continued.
A couple of things there. First of all, China isn’t “paying” the US anything as it relates to the tariffs. That’s not how the mechanics of this situation work. It is imperative that the media calls the president out on that point each and every time he brings it up. This is one lie that cannot be allowed to be accepted as “truth”, because it is manifestly, demonstrably false.
As far as China’s “monetary devaluations” go, bear in mind that it is impossible to nail down, precisely, what part of the yuan’s weakness is attributable to “manipulation” and what part is due to market-based expectations of economic weakness. The latter, to the extent it’s predicated on trade frictions, is on Trump. That is, he is the one precipitating yuan weakness, not China.
In fact, China this week leaned hard into the fix in order to avoid too much depreciation. “Chinese authorities sent a clear signal via the daily currency fixing that it wants to maintain stability in the yuan as the US amps up pressure on the nation’s imports”, Bloomberg wrote Friday, in a straightforward piece making the point. “The PBoC set the reference rate for onshore trading stronger than 6.9 per dollar, even after the offshore currency tumbled to as low as 6.9786 in the wake of President Donald Trump’s announcement about new tariffs”.
“As we have learned in the past, fundamentals alone are insufficient for CNY to break 7.0 [as] policymakers have the tools to stop it and put simply it is their choice what happens”, SocGen’s Jason Daw wrote. In other words, if it weren’t for Beijing’s efforts, the yuan would have likely depreciated past 7 on a number of occasions, so when you hear Trump suggest the PBoC is doing everything in their power to weaken the currency, he is, as ever, lying.
Of course, if China gets fed up with the situation, they may well just let the market drive the currency lower. “The calculus on preventing a break of 7.0 will change if policymakers believe the latest tariffs lock the two sides into a stalemate/escalation scenario”, Daw continued, in the same Friday note. “If so, there is no incentive to stop the CNY from depreciating at least in line with its trading partners”.
Trump continued on Saturday, parroting his usual line about the tariffs not driving up domestic prices. “So far our consumer is paying nothing”, he said.
That isn’t entirely true. If you look at the categories affected by the tariffs, there has, in fact, been an impact. But more importantly going forward, the next round of duties will affect a projected $120 billion in consumer goods. Here’s why “this time is different”, so to speak:
The president closed out his Saturday trade bombast by reminding everyone that there’s “no inflation” and that he’s getting “no help from [the] Fed!”
On the inflation front, the chart above suggests consumer prices will be pushed higher sooner or later if the administration persists.
As far as the Fed goes, life is becoming wholly miserable. Jerome Powell took a big risk by placating Trump, who now knows he can co-opt monetary policy in the trade war simply by engineering outcomes in short-end rates markets.
By acting increasingly unhinged on trade, Trump can force markets to price in Fed cuts, and when that pricing becomes extreme enough, it puts the Fed in a position where policymakers have to choose between disappointing markets at the risk of tightening financial conditions, or effectively doing the president’s bidding.
“On Wednesday, Fed Chair Powell said that concerns about the trade war were one reason for the Fed’s 25bp rate cut, then on Thursday, President Trump escalated the trade war further”, BofA wrote in a Friday note.
Rates did exactly what you’d expect them to do under the circumstances. “Markets responded by pricing in substantially more Fed accommodation”, BofA continued, noting that “between the time of the announcement and close of business on Thursday (a little over 3.5 hours), the 2-year Treasury yield fell by almost 8bp and the markets priced in about 10bp of additional Fed rate cuts by year-end”.
Little wonder the president said, on Thursday, that he isn’t concerned with the market reaction to the tariff bombast. In a very real sense, the market is doing precisely what he wants it to do. Past experience indicates that once the short-end becomes wholly convinced that more cuts are coming, stocks will rebound on the assumption that easing in September and December is assured.
Once Trump locks in that additional easing, it will embolden the administration to push the tariff envelope further. It’s a trap. Here’s how it works:
Again, this makes life very, very difficult for the Fed. Here’s BofA to drive home the point by reiterating everything noted above:
For one, [the Fed] will probably be trying to offset an even larger negative economic shock. But even if that shock does not materialize, the rally in rates means that the Fed will have to use up more ammunition if it wants to meet market expectations and avoid financial tightening. The risk is of a perverse feedback loop in which trade-war escalation keeps offsetting Fed easing, leaving the Fed with very little ammunition to fight the next recession, while the economy remains relatively soft.
Suffice to say Trump does not care about the long-run ramifications of this for monetary policy or for the US economy.
Rather, he is fixated on short-term gains, and that penchant for myopia will only increase as the election gets closer.
“Is the FED going to underwrite Trump’s trade war?”…Jonathon Ferro.
Trump is playing with fire. Likely we will pay for it, ultimately it is likely to lay his reelection chances to waste.
As always with Trump, the question is whether he is lying, stupid, or demented and forgot what tariffs are and who pays for them. Where ever that nexus lies, it is almost cosmic how convenient his messaging is.
Think about that. If you polled the American people, what percentage would know who pays tariffs? Would that fact become opinionated based on support for Trump? Would people lie just because Trump said it and keeps repeating it? What percentage is even marginally aware that a trade war is going on? How many forgot or did not learn basic high school civics?
Take it on face value. Assume Trump is right. Concede everything. China pays the tariffs. Fine, whatever. But they retaliate. The Chinese impose tariffs on American imports. Who pays for those in that scenario? When Trump subsidizes farmers hurt by the easy to win trade war, where does that money come from? If the United States is getting tens of billions of dollars from China now, why are we negotiating for that to stop? Even in the orange sky reality Trump has manufactured, the media cannot ask the right questions.
Trump is verily the President America deserves…
Lets face it … wall street LOVES the fact that the Fed can be forced by Trump to play ball and keep asset prices inflated…
Implies a range trading approach to stocks and volatility and a directional approach to treasuries and spreads – until this tweet-tariff-ease cycle breaks? And generally, exposures reflecting lower return/risk ratio for stocks?
And I suppose there was nothing in his tweets about helping with the infrastructure problems in Cincinnati or help from the administration with those millions China is sending us (ha ha) for the third world entity of Baltimore??