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Will Trump Give Up His Leverage Over Jerome Powell To Secure A Deal With Xi?

Sealing the deal with Xi may require giving up on rate cuts in an election year.

Apparently, Bob Lighthizer, Steve Mnuchin and Liu He will speak over the phone Friday in an effort to move towards agreeing on the text of the nebulous “Phase One” trade deal that Donald Trump continues to insist is real, despite nobody (including him) being able to say, with any degree of specificity, what’s in it.

All we know is that Trump delayed a tariff hike, and that China has tentatively committed to buying more US farm products, although that depends on your definition of “more”.

The Chinese are willing to ramp purchases back up to pre-trade war levels in year one of any deal. Getting to the $40 to $50 billion level that the White House has variously touted will require tariff relief.

Read more: China Willing To Buy The Same Amount Of US Farm Goods They Bought In 2017. Maybe.

That tariff relief will be discussed by Mnuchin, Lighthizer and Liu, according to sources who spoke to Reuters.

Essentially, Beijing wants Trump to remove the tariffs implemented on September 1 and take the planned December escalation off the table.

“To seal the deal, Beijing is expected to ask Washington to drop its plan to impose tariffs on $156 billion worth of Chinese goods, including cell phones, laptop computers and toys, on December 15”, Reuters says, adding that the Chinese are “also likely to seek removal of 15% tariffs imposed on September 1 on about $125 billion of Chinese goods”.

That would amount to Trump rolling back the escalation he announced on August 1, the day after the Fed meeting. That escalation was enhanced on August 23 after Jerome Powell’s speech in Jackson Hole (on the same day, China announced retaliatory measures). On August 13, Trump split the new tariffs into two tranches, in a bid to prevent a spike in prices on consumer goods ahead of the holiday season. That triggered a rally in US equities, which promptly disappeared the following session when the 2s10s curve inverted.

Note what the August 1 and August 23 events have in common: The Fed. 

The scheduled December 15 tariff escalation comes within days of the final FOMC meeting of 2019. If the Fed cuts rates next week, it’s likely that Powell will telegraph a pause or an outright stop to what is, so far anyway, a shallow easing cycle. If Trump removes the threat of the December tariffs, he will effectively relinquish the most effective tool he has when it comes to dictating US monetary policy.

“The market moves are much larger, statistically highly significant, and more clearly skewed to the downside, ranging from -14bp to +4bp”, Goldman said earlier this month, in the course of comparing the reaction in rates to Trump’s trade tweets to how Fed funds futures respond to monetary policy tweets. “Cumulatively, the impact on market expectations for the funds rate is about -40bp when we include tweets indicating escalation of trade tensions and tweets indicating de-escalation, and about -60bp when we focus only on tweets indicating escalation”.

(Goldman)

If Trump commits to removing the December tariff escalation, he will effectively give up leverage vis-à-vis Powell in order to secure a signature from Xi at APEC next month.

Of course, Trump could always just take those tariffs off the table now and then put them back on after Xi signs on the dotted line, but doing that would risk a grievous market selloff and would probably cement (both in the minds of the market and the Chinese) the idea that the US president isn’t in full possession of his faculties.

It’s also possible Trump will be impeached between now and the December Fed meeting.

You’re reminded that the August 1 escalation effectively amounted to Trump making good on his threat to go “all-in” on the China trade war. The tariffs announced that day meant that as of December 15, the US would have applied levies to the entirety of Chinese imports.


 

6 comments on “Will Trump Give Up His Leverage Over Jerome Powell To Secure A Deal With Xi?

  1. Seriously, with rates already so low, what difference would another 25 bp make? Except to banks and pension funds.

    • None. But Trump is after a lot more than that. Indeed, that’s the point. If he gives up on the tariffs, he won’t be able to engineer ZIRP in 2020 ahead of the election.

      • Not that he is aware of it, but low rates are devastating bank earnings and, maybe more importantly, wreaking havoc with private & public pension fund assumptions. It is just forcing companies to put more money into shoring them up. That’s money not spent on expanding their businesses.

    • I think a lot of what we are seeing reflects the future which is going to be a Multilateral world order …replacing the Unilateralism brought on by the globalization of the last 40 or so years… In that respect this time is different at least when compared to the last century or so…
      I wonder if change can be good????

  2. vicissitude

    Re: “The scheduled December 15 tariff escalation comes within days of the final FOMC meeting of 2019”

    But, don’t forget the other upcoming hot potato in a few weeks!

    The House passed a continuing resolution (CR) on Sept. 19 that funds the government through Nov. 21, which the Senate passed on Sept. 26 and President Trump signed on Sept. 27. The House and Senate, meanwhile, are continuing to negotiate full appropriations for the rest of FY 2020, including through a package of four appropriations bills that has currently stalled.

    FYI: But not all budget deals are created equal when it comes to offsets. The first two accords, in 2013 and 2015, were fully offset and then some, trimming a net $17 billion from 10-year deficits. The 2018 deal, enacted under all-GOP control of the legislative and executive branches, is by far the priciest — clocking in at a hefty $358 billion in gross costs over a decade. Only about 29 percent of that cost is offset, though $90 billion in emergency disaster relief funds isn’t included in those calculations.

    And that was shortly after the Republican Congress and President Donald Trump pushed through a tax cut plan in late 2017 that was estimated at the time to cost $1.5 trillion over a decade, even after offsets. Against that backdrop, House Democrats aren’t keen to offset higher nondefense discretionary spending.

    https://www.rollcall.com/news/congress/familiar-offsets-could-resurface-in-spending-caps-talks

  3. vicissitude

    Will the Fed help pay for the Wall?

    But getting to a final compromise requires agreement on spending allocations, known as 302(b)s, for the 12 annual bills. And so far, the House and Senate have been working from different spreadsheets.

    But informal talks in recent weeks have been slow going. “I’m very concerned about the appropriations process,” he told reporters. While compromise spending allocations are sorely needed, he said, the willingness to compromise “does not appear to be present at this point.”

    Similarly, the president might refuse to sign any appropriations bills before the Homeland Security spending measure lands in his lap with fresh funding for the border wall and the Military Construction-VA bill clears Congress with extra cash to backfill the $3.6 billion he shifted toward construction of the wall.

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