We are still reeling from Powell’s admission that trade uncertainty is driving policy. The Fed has spent months scripting a communication that avoided becoming partisan and getting caught up in trade hype. Consequently, the three consecutive 25bp cuts were described as an insurance policy against trade tensions. However, Powell mention of "phase one" trade deal as support for the pause indicates the media's influence over US monetary policy. There is "zero to no chance", US President Trump is informing the Fed on trade policy strategy. The Fed has indicated they do not respond to rhetoric but these are exactly what’s happening. Therefore, more or less, Powell is getting his info the same as the rest of us. This is a worrying reality since shifting from mechanical and clinical to guessing US and China’s next move increases the probability of a policy mistake.
Data on US consumer remains strong. The contraction of business investment has not damaged household spending or general positive outlook. Despite the weakness in manufacturing, there are scant signals the US is suffering. On a broader note, we remain optimistic that US-China tension will not derail the global economy. Trade has a notorious way of working around barriers. The longer tensions drag on, the more business will find a workaround. Exports to the US from the Southeast Asian nations in many cases risen by double digits. Market still expect the Fed to ease the US away from recession in 2020, which is supporting the USD.
In our view, President Trump will use the US-China trade as a political tool. Therefore, we need to forecast within the context of politics. Currently, by keeping tensions high, Trump gets the interest rate cuts he wants and strong support from his base (and broader sources). As the US moves closer to Nov 2020, Trump will have a powerful lever to inspire voters and jumpstart the economy. In the near term, we would not expect a meaningful breakthrough.
By Peter Rosenstreich