Presidential tweets still a big headache for Fed Chair Powell even when he's not the target…


The world is well aware of the President's super-aggressive negotiating style. It follows that much of Mr Trump's most forthright posturing will not necessarily be taken completely at face value. One only has to look at his journey from threatening to wipe N. Korea off the map to love-ins with Kim Jong-un (and back again to somewhere between the two even as N. Korea resumes missile testing) to realise that it's wise to treat presidential rants with some caution. One could argue that bullying is just part of the bargaining position, and very often there's more than an element of truth to that, but Mr Trump has already shaken up the old ways of doing things to such a degree that only a fool would just dismiss his threats as idle. The threat is genuine enough because, rightly or wrongly, this president has shown that he's prepared to go where his predecessors wouldn't.

All of which means that the markets are struggling to interpret just how bent out of shape they should be over Mr Trump's tweets that the US is poised to raise the 10% tariff on $200bn of imports from China to 25%. Suggestions that the US move is driven by Chinese back-tracking over previously agreed positions, particularly those concerning an end to unfair state subsidies, seem serious enough for just such a move to be a plausible response. The markets certainly thought so yesterday, with all the usual "risk-off" moves that we've come to expect when the temperature is raised: equities down, safe-haven bond prices up (and yields down), dollar and jap yen up.

Unsurprisingly, things are still a bit nervy this morning. Mind you, some comfort has been gained from the news that the Chinese trade delegation due in Washington this week IS coming after all. There had been some concern that Beijing might consider that making the trip in these circumstances -- under duress, so to speak -- might be perceived as constituting a loss of face. Not so, as it turns out… and what's more, the head negotiator Liu He will be there.

Who knows how things will go? The latest US stance may well be just a negotiating tactic but is a dangerous one in that it increases the chance of a "no-deal" rather than reduces it. But then that's what Trump-style brinkmanship does. One possible scenario doing the rounds is that the tariffs will be increased but only as negotiations continue, and they will be reduced again before long.

Anyway, what's it got to do with Fed Chairman Jay Powell… a man who might be pretty tired of Mr Trump sticking his oar in?

Mr Powell is clearly a little uncomfortable with the fact that traders seem convinced that a rate cut is coming in 2019… futures prices had almost built in a full 1/4 point cut. In his statement last week, he went out of his way to stress that the forces depressing inflation (and thereby putting downward pressure on rates) were "transitory".

He made a reasonable case too, but the problem is that a deterioration of the prospects for trade, very much back in the frame after Mr Trump's tweets, undermine prospects for growth… and that increases the chances that below-target inflation will be anything BUT a transitory problem.

In addition, we know that two of the normal market consequences of an increased likelihood of trade conflict are a stronger dollar and weaker equities. The level of the dollar and the price of equities play an important role in determining "financial conditions", and a stronger greenback and lower share prices both tighten those conditions and theoretically promote the chance of a cut in headline interest rates as a counter-measure. Rather than sticking with Mr Powell's suggestion that neither a rate rise nor a rate cut is appropriate, after the presidential tweets and analysis of their possible ramifications, traders have resumed their betting on the latter to be the more likely. Well, he tried…

Presumably, President Trump, who of course has been screaming at the Fed for ignoring his calls for lower rates, won't be unhappy if the unintended consequence of his latest intervention increases pressure on the Fed to do as he would like. But then again, he won't like it if it results in a stronger dollar and lower equity prices. Whether the chosen course of action is justified or not. that's the worry when you start tossing metaphorical grenades… the results are not always predictable and quite often not entirely desirable either.

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