If there was a silver lining in Friday’s excessive reaction from Donald Trump both to China’s retaliatory tariffs and Jerome Powell’s Jackson Hole speech, it was that the curve bull steepened on the apparent assumption that between the chair’s focus on international developments and the president’s efforts to exacerbate the trade tensions, the Fed will be forced into an aggressively dovish policy response.
Indeed, Goldman is out increasing their subjective odds of a 25bp September cut to 80%. The bank now puts the chances of another 25bp cut in October at 60%. “In his remarks… Powell reinforced the case for additional rate cuts in the face of ‘significant’ risks and an ‘eventful’ three weeks since the July meeting”, Goldman writes, adding that “Powell noted a long list of downside risks, promised to ‘act as appropriate’, and noted that shifts in the anticipated path of policy have contributed to keeping the outlook favorable thus far”.
If Powell thought the last three weeks were “eventful”, it looks like the White House wants to show him just how much more “eventful” things can get.
To be sure, the mood among some market participants is outright incredulity, although, as Tony Farren, managing director at Academy Securities, was quick to point out, everyone should have seen this coming.
“The market should have realized more pressure was coming on China from President Trump on Wednesday when he said he was ‘The Chosen One’”, Farren said Friday, on the way to wondering whether the president’s tweets are even consistent with US law. “The President… ordered FedEx, Amazon and the Post Office to search packages coming from China for fentanyl. Is this even legal?”, he asked nobody in particular.
Who knows, Tony. What we do know is that Trump doesn’t care much for legality when it comes to pushing his agenda and the instances of cooler heads prevailing when tempers flare are precious few in this administration. If planned September talks between Bob Lighthizer, Steve Mnuchin and the Chinese side are canceled, all bets are probably off, and the pressure on the Fed and the ECB to deliver will be commensurately heightened.
Not that this matters because it’s completely silly to measure Dow moves in points (as opposed to percentage gains/losses), but the following chart is highly amusing even if it’s entirely useless.
“Trump has definitely thrown a monkey-wrench into Powell’s plan on settling down markets”, Kevin Muir, of Macro Tourist fame, said. “It’s tough to keep up with his tweets, but two takeaways: Trump is not giving up blaming Powell and Xi for economic problems and Trump will now cut taxes bigly [and] blame Powell for the deficit”, Kevin continued.
That latter bit is an interesting theory. Behind the scenes, the president is said to be “rattled” about the economy and quite a bit of digital ink has been spilled this week documenting the administration’s internal discussions around more tax cuts, whether in the form of a payroll tax break aimed at helping middle-earners, or a move to index capital gains to inflation, a strategy that would ultimately hand some $100 billion to the wealthy. But those efforts are ostensibly constrained by the looming $1 trillion deficits forecast by CBO this week.
David Rosenberg weighed in on Powell’s speech. “[The words] ‘Risk’ and ‘Uncertainty’ were used 23 times today”, David remarked. “Whether the Fed goes 25 or 50 bps at the next meeting, the final destination is zero”, he went on to muse.
Suffice to say that would be just fine with Trump, who, judging by Friday morning’s tweets, is prepared to drive the car completely off the cliff at high speed if it means engineering rate cuts.
Trump’s presidency has been described as a non-stop effort to undo the legacy of his predecessor. That’s a pretty apt description and it has a lot of explanatory power as a framework for understanding the administration’s policies. But one legacy of the Obama years that Trump really wishes he could have preserved is easy money.
And just think, all he had to do was swallow his pride and snap his fingers to reappoint the fairy godmother.
It’s far too late for that now, though.