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‘Extremely Highly Confident’

“We intend for this package of tariff reductions to mark just the beginning of a process that will lead to additional agreements that create more free, fair, and reciprocal transatlantic trade”, Bob Lighthizer said Friday, announcing what the US billed as a kind of mini trade deal with Europe.

Under the agreement, the EU will drop tariffs on American lobster, a development which could assist Susan Collins, who faces an uphill battle to retain her Senate seat. Donald Trump took up the crusade in June during a characteristically farcical event in Bangor, Maine, where he spoke with aggrieved fishermen and dubbed Peter Navarro “the lobster king”.

In exchange for removing duties on lobster, the EU will get relief on certain crystal glassware, cigarette lighters, prepared meals, and whatever “propellant powder” is. The grand total value of the “deal”: about $200 million.

Needless to say, this was more publicity stunt than anything else, even as we should be happy for any fishermen it might assist. Lighthizer is keen to show progress after years of stalled trade talks between Brussels and Washington. The two sides remain at odds on pretty much everything.

Last October, Trump claimed victory when the WTO green-lighted retaliatory measures against $7.5 billion in EU goods to compensate for what the body decided were illegal subsidies for Airbus. It was the largest arbitration award in WTO history and came despite Trump’s repeated claims that the organization is “always f—ing” America. The USTR promptly announced its intention to tax everything from French wine to cheese to whisky to olives, pork, butter and yogurt. Europe made it clear they would retaliate in 2020 once a parallel dispute involving Boeing is adjudicated. A decision on that is due next month. In June, Lighthizer threatened to deploy ongoing “carousel” tariffs, an especially pernicious strategy that involves changing what categories of products are subject to duties. Trump has, of course, variously threatened to impose punishing levies on European cars, and at one point nearly lost his patience with Emmanuel Macron over France’s digital tax.

Friday’s mini deal is a microcosm of the broader trade war — unrealistic promises followed by fraught bilateral discussions which eventually yield very little in the way of results, especially by comparison to the uncertainty the frictions created along the way.

That was what counted as “headline” market news on a Friday otherwise dominated by soundbites from postmaster general Louis DeJoy’s testimony to lawmakers, who were assured the postal service is “extremely highly confident” that it can cope with what are expected to be millions of mailed-in ballots.

Speaking of “extremely highly confident”, US equities rose a fourth week, because that’s what stocks do — they go up. And you know, now that I say that sarcastically, it is true. Stocks do generally rise over time. I mention that only because in the post-financial crisis era, everyone has become so accustomed to adopting a perpetually circumspect approach to describing gains in risk assets, that we sometimes forget one simple thing: buying stocks and forgetting about them other than to make sure the dividends are being reinvested has been a good way to make a lot of money over the decades.

In US rates, Treasurys rose every session this week with the exception of Wednesday’s FOMC minutes-inspired selloff.

10-year yields were richer by 7bps on the week (green below). The rally comes on the heels of the biggest weekly selloff since June as the market digested a supply deluge earlier this month (red in the figure).

The 5s30s flattened 7bps. Next week brings a virtual version of Jackson Hole, and all eyes and ears will be trained on Jerome Powell, who will presumably attempt to communicate something about hotly-anticipated changes to the Fed’s inflation framework.

“We remain comfortable with the prevailing range of 50-72 bp in 10s and in light of the realities of the global economic outlook selling any attempt to breakout into a lower-rate environment or buying a spike in yields has been, and will remain, the most prudent strategy until autumn arrives”, BMO’s Ian Lyngen, Benjamin Jeffery, and Jon Hill wrote Friday.

This week’s US data painted a mixed picture of the world’s largest economy, as regional Fed surveys suggested activity is slowing and US jobless claims climbed back above 1 million, while the housing market remains robust and PMIs came in better than anticipated Friday.

“Looking ahead, the sequential improvement story could be in for a bit of a challenge in the coming couple of months [as] various ‘real time’ activity indicators, such as Google mobility data and US consumer spending and small business revenue trackers, have recently started to tread water”, Nordea’s Andreas Steno Larsen said. “They are not falling in any dramatic way, but it seems that the period of positive data surprises could come to an end, which historically has meant setbacks for risky assets”.

Oil managed a third weekly gain despite slipping headed into the weekend.

Notably, drilling appears to be making a comeback as crude prices show continued signs of stabilization. The US oil rig count rose by 11 this week, Baker Hughes said Friday.

“Frack activity reached a bottom in the second quarter’, Halliburton CEO Jeff Miller told Bloomberg. “I think we’ll see drilling activity reach a bottom in the third quarter and then some modest recovery”.

Gold fell a second week, which is somewhat disappointing for bulls given the boost sentiment got on Monday from the disclosure of Berkshire’s stake in Barrick. The dollar edged higher.

Ultimately, market participants are now awaiting the next catalyst — or the next shoe to drop, if you’re the pessimistic type.

For what it’s worth, BofA’s Michael Hartnett says your “peak liquidity ‘floors'” are the MOVE at 40, the VIX at 20, benchmark yields at 50bps, and high yield spreads at 500 bps. At that juncture, it might be time for a “‘peak policy’ correction”.


2 comments on “‘Extremely Highly Confident’

  1. “Propellant powder” would be gunpowder.

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