Just so we’re all on the same page, Donald Trump’s Friday morning suggestion that he may not go along with tariff relief for China in the interest of securing Xi’s signature on an interim trade deal is a nonstarter.
Although most expected Trump would at least feign hesitation on rolling back the tariffs in a feeble attempt to avoid coming across as “weak” to his base, the president’s comments were still an unwelcome development headed into a holiday weekend.
In remarks to reporters at the White House, Trump again insisted he’s perfectly “happy” with the existing state of affairs because the US is “taking in billions in tariffs”. Nobody is ever amused when he reverts to that line. First, it isn’t true (China doesn’t pay the tariffs). Second, it suggests he’s still clinging to the notion that the trade war is “good” and, even if it’s not “easy to win” (as he famously declared in March of 2018), it’s at least “winnable”.
Shortly after Trump’s remarks, Global Times editor Hu Xijin (who tweets on behalf of the Party), made it clear that if the US were to inexplicably reverse course on plans to roll back tariffs, there would be no deal.
“What President Trump said is not what the markets expect”, Hu said, stating the obvious.
US equities are perched at all-time highs and the yuan has rallied for five consecutive weeks. Both of those developments (and you can point to myriad other market manifestations of the trade enthusiasm) are almost entirely predicated on the assumption that the September 1 tariff escalation will be rolled back and the scheduled December 15 levies taken off the table.
Failure to validate those market expectations will invariably lead to a reversal of recent gains in risk assets and pronounced yuan weakness.
It’s possible that stirring the proverbial pot anew could put Fed cuts back in play (STIR traders have now largely priced out the prospect of the “mid-cycle adjustment” morphing into a full-on easing cycle), but that may be small comfort if Trump blows a chance to cement the “Phase One” deal at the heart of the recent rally.
The preliminary November University of Michigan sentiment report showed spontaneous negative references to tariffs were still mentioned by one-in-four consumers this month. That underscores the notion that even as we inch closer and closer to an interim trade deal, the spat with China continues to serve as a psychological drag. Stocks lost their immunity to bad trade news a long time ago (the following chart is from September, when the Michigan survey contained some expanded color on consumers and trade jitters).
The Global Times’s Hu went on point out that Trump on Friday said “the US hasn’t agreed to a rollback of tariffs”. That, Hu remarked, is “not a flat denial”.
Still, Hu’s message was clear: An interim agreement that doesn’t include tariff rollbacks is a nonstarter. “What’s certain is that if there’s no rollback of tariffs, there will be no phase 1 deal”, he said.
If so, you can fax them to Beijing and they’ll get back to you on Monday.