There was talk Wednesday of a “trimmed down” stimulus plan in Washington, where Democrats and Republicans may seek a kind of bridge agreement worth just $500 billion. It would include assistance for the beleaguered post office as well as help for schools and businesses, but leaves the thorny issue of state and local government financing to a later date and reportedly doesn’t include stimulus checks.
That price tag is just half of what the GOP was offering and only amounts to a fifth of Democrats’ “meet halfway” proposal ($2.4 trillion). It’s miles away from the $3.5 trillion allocated in legislation passed by the House in May. Both the Senate and House are in recess, but the latter is on its way back to vote on a bill aimed at ensuring the postal service has the wherewithal to process a deluge of mail-in ballots. (Postmaster general Louis DeJoy’s efforts to allay fears late Tuesday are seen as insufficient.)
Although Pelosi told a Politico event that Democrats are “willing to cut our bill in half to meet the needs right now”, her spokesman clarified she simply meant the same $2 trillion offer already rejected by Steve Mnuchin and Mark Meadows.
Whatever the case, barring some kind of unforeseen breakthrough, this now counts as failure. The White House and the GOP see an opening with Pelosi’s decision to vote separately on funding for the post office but, as noted here on Monday, that likely doesn’t mean her position on a piecemeal approach has softened. Rather, Democrats view possible shenanigans involving mail-in ballots as an even more pressing emergency than the rest of the issues the stimulus package aims to address.
The bottom line: passage of a bill on the order of $2 trillion now seems all but impossible.
A $500 billion stopgap bill would help, I suppose, but it would amount to a tacit admission by both parties that legislating has become impossible — that the US is experiencing political decay. The country’s labyrinthine system aimed at distributing power has now failed on two accounts: it did not stop an ambitious executive from moving the country towards authoritarian rule, and it has all but frozen the legislative process, leaving the public to ponder an ineffectual lawmaking body and an autocratic executive totally bereft of even the most basic leadership skills.
Little wonder the dollar looked shaky again Wednesday, having dropped five straight sessions to the lowest since 2018. Remember, all of the above speaks to the country’s ineffectual virus response, which in turn suggests the Fed is in it for the long haul. That’s pushing down real rates, further undermining the currency, and emboldening those betting against it, even as it bolsters risk assets — like your stocks. “US 10-year TIPS yields are back down to -1.03%. The renewed downtrend this week has helped weaken the dollar and no doubt, helped drive the S&P to new heights”, SocGen’s Kit Juckes wrote Wednesday.
“The way the dollar tracks US real yields supports the idea that the EUR/USD rise is more about dollar weakness than European Recovery Fund-inspired euro strength”, Juckes went on to say. “And it suggests that if today’s FOMC Minutes [tip] the Fed’s [intent to] keep rates lower regardless of inflation upticks, the dollar’s going to remain under pressure”.
The Fed may adopt more explicit language next month around forward guidance and tip its hand on a new approach to sustainably achieving its inflation target. Market participants will parse the July minutes for clues in that regard.
On the geopolitical front, the relationship with China is finished — Sino-US ties are “shot to hell”, as the president would put it. Trump on Tuesday claimed he canceled trade talks set for last weekend. “I canceled talks with China”, he told supporters in Arizona. “I don’t want to talk to China right now”.
Who knows if that’s true (some sources cited scheduling conflicts) but it’s certainly plausible. After all, China embarrassed him. Through the end of the second quarter, Beijing was less than 25% of the way towards meeting their year-one purchase targets under the trade agreement signed in January (figure below). On Wednesday, reports suggested the talks are back on and will be rescheduled.
Over the past several days, Trump has talked up China’s buying of farm goods, and Beijing is apparently set to double purchases of oil next month. Or at least they were before the talks were canceled. “As much as 14 million barrels — or seven super-class tankers full — of US oil will be loaded next month for delivery to China”, Bloomberg wrote this week, citing estimates by Vortexa. “If all those shipments make the trip that will be more than double the volumes set for August”.
Analysts called that “politically motivated”, which by definition means China will cease to be a buyer in size if that “motivation” were to wane.
Meanwhile, the Trump administration is pressuring colleges and university endowments to divest their holdings of Chinese stocks ahead of what the State department warns will be a wave of delistings.
“Boards of US university endowments would be prudent to divest from People’s Republic of China firms’ stocks in the likely outcome that enhanced listing standards lead to a wholesale de-listing of PRC firms from US exchanges by the end of next year”, a letter from the desk of Keith Krach, undersecretary for economic growth, energy, and the environment, reads.
Chinese shares fell the most in a month Wednesday. Earlier in the summer, mainland equities surged into a mini-bubble, but subsequently stabilized. The Shanghai Composite is among the best-performing benchmarks in the world.
China on Wednesday suggested the Trump administration is creating a “discriminatory” environment for Chinese companies, and warned that erecting “obstacles” to capital flows is not in anyone’s interests.
The warning to universities was just the latest step to choke off capital to Chinese firms. In May, Trump effectively banned the Federal Retirement Thrift Board from implementing a planned shakeup that would have entailed investing some government employee savings in Chinese equities. The administration is also looking to ditch a seven-year-old agreement between US and Chinese auditors after years of complaints from the Public Company Accounting Oversight Board. If the US exits the deal, which appears all but assured, the stage will be set for a crackdown on Chinese listings.
This amounts to more weaponization of the US dollar and its reserve status. China is, of course, the second-largest holder of US obligations.
On Monday, Trump delivered a veritable death blow to Huawei, and talks around TikTok continue following a pair of executive orders from The White House.
“The US Dollar is still the Death Star. It remains ‘a technological terror’ due to US power to cut other countries off from it”, Rabobank’s Michael Every wrote, in his daily missive.
He called the State department’s “advice” to colleges and universities “another step towards blanket capital controls”.
I’m reminded of something JPMorgan’s Marko Kolanovic wrote in 2018. The more aggressive the US is when it comes to effectively using the greenback as a tool of economic warfare and deploying that weapon indiscriminately against allies and enemies alike, it’s possible the world will begin to see more utility in de-dollarization. As Marko put it, “with the current US administration policies of unilateralism, trade wars, and sanctions increasingly affecting both friends and foes, the question arises whether the rest of the world should diversify away from the risks of the USD and USD-centric finance”.
“While the current US administration may be a catalyst for long-term de-dollarization, such diversification may be prudent even if Washington policies change”, Kolanovic added. “For instance, currency/rate diversification might be in the best interest of Emerging Market economies, time and time again left at mercy of US Federal Reserve rate cycles”.