One person who seems to generally agree with our contention that nobody ever really believed Donald Trump would succeed in striking a comprehensive trade deal with China (where that means Beijing acquiescing to a wholesale rethink of their economic model) is Nomura’s Charlie McElligott.
Early Thursday, Bloomberg reported that Chinese officials are privately expressing doubts about whether an all-encompassing agreement with the US is feasible. That, we suggested, is in line with how the “rest of humanity” views the negotiations.
“Look, I don’t believe that any of the headlines are a surprise to anyone”, McElligott said in a Thursday note, adding that “the vast majority of market participants have remained highly skeptical of a deal ‘breakthrough’ ever coming on the thorny issues”.
Indeed. The fact is, trading trade (so to speak) has become more about tactical opportunities around the ebb and flow of the rhetoric and how that interacts with positioning, than it is about anticipating a “real” agreement that puts an end to this now 17-month-old charade.
“Instead, investors remain [focused on] a generic calming of incendiary language from both sides [and] a meaningless ‘Phase 1’ agreement, in order to simply ease local market tensions”, McElligott goes on to write, on the way to reiterating that the real “best case scenario” here is that the scheduled December 15 escalation is taken off the table.
And yet, the problem with taking the threat of 15% levies on another $160 billion in Chinese goods out of the equation is that it would effectively strip Trump of his leverage when it comes to compelling the Fed to cut rates for a fourth time in December.
We’ve been over that on too many occasions to count, most recently in “Will Trump Give Up His Leverage Over Jerome Powell To Secure A Deal With Xi?“.
“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”.
In other words, when it comes to moving market expectations in the direction of more rate cuts (and thereby “cornering” the Fed by forcing them to choose between staying put in the interest of not emboldening Trump further or cutting to avoid wrong-footing the market and thereby catalyzing an abrupt tightening in financial conditions), trade escalations are far more effective than petty tweets about Jerome Powell.
McElligott underscores that on Thursday.
“It has been noted here and by others that many believe Trump will keep at least one more ‘negative trade surprise’ in his pocket, predominantly in order to keep the Fed and his strong desire for further easing ‘in play’, especially as he remains emboldened by a stock market at all-time highs”, he says. “Rinse, repeat ‘Gamma’ shocks”.
That latter bit is a reference to what happened earlier this month, when a variety of “worst case scenario” expressions/bets and their second-order knock-on effects collided with good news on trade and Brexit to catalyze a melt-up.
He goes on to note that when it comes to yesterday’s action in equities at the index level, “the rally in Spooz on a ‘Fed Easing’ day to the monster 3,050 strike is just about the least surprising thing ever, considering the $Gamma there @ $10.9B (!!!), the largest $Gamma strike on the strip”.
As far as the Fed goes, Charlie’s take is essentially that Powell’s emphasis on inflation (i.e., that the Fed would have to see a sustained large spike to compel them to hike rates) means that the bar to hike is much higher than the bar for another cut.
“Powell appeared to attempt to walk back any perceived market ‘hawkishness’ as he effectively signaled a completely ‘asymmetric’ policy going forward, one where it would take ‘significant, persistent’ rise in US inflation before they would ever again be able to consider a rate hike, versus what we already know is a ‘low bar’ to cut”, he writes.
As detailed here extensively on Wednesday evening, the Street is hopelessly divided on what comes next, with projections ranging from no more cuts to three more.