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Trump’s trade comments

By David Morrison  |  27/11/2018 16:11

Last night President Trump upped the hostile rhetoric towards China ahead of this week’s G20 meeting. Meanwhile, the Fed’s new Vice-Chairman delivered some hawkish commentary

After last night’s US close, the Wall Street Journal reported that President Trump said it was “highly unlikely” that he would hold off from raising tariffs on $200 billion of Chinese goods. Beijing has requested that the US cancel the proposed increase in tariffs to 25% from 10% which is planned for the New Year. The move would come if Mr Trump and Chinese President Xi Jinping fail to reach an agreement on trade later this week. The two leaders are expected to get together in a side meeting at the G20 in Argentina which takes place this Friday and Saturday. President Trump said he would also put tariffs on $267 billion of Chinese imports that are currently not subject to duties, should negotiations fail. This is a tough blurt of rhetoric from President Trump and runs counter to more constructive comments made by his chief economic advisor Larry Kudlow and Treasury Secretary Steven Mnuchin. For this reason, it could be nothing more than an attempt to rattle China ahead of negotiations. That appears to be what investors think as an overnight sell-off in US stock index futures evaporated once the market opened this afternoon.

Deal or No Deal?

Having said that, most Wall Street analysts believe that a deal is unlikely at this stage. President Trump has said that China wants a deal "very badly". However, there are some serious sticking points over cybersecurity and US allegations over Chinese intellectual property theft that could prove too difficult to solve in just one meeting. The most likely result is that the two leaders agree to further talks. If so, then unless Trump backs down on last night’s threat, more tariffs on Chinese goods would follow.


Earlier today the (newish) Federal Reserve Vice Chairman Richard Clarida delivered some prepared comments. Mr Clarida pondered on the neutral rate for the fed funds rate, although he said it was unclear where it may be. Several analysts have suggested it may be around 3.0% - somewhat lower than the 5.0% from previous cycles. If so, then the Fed is only three hikes away from achieving this target (assuming each hike is 25 basis-points). However, just a couple of months ago Fed Chairman Jerome Powell suggested that the US central bank may be comfortable overshooting the neutral rate, just as it undershot it for so many years. Mr Clarida said that this current lack of clarity over the neutral rate supported the case “for gradual policy normalization, as it will allow the Fed to accumulate more information from the data about the ultimate destination for the policy rate and the unemployment rate at a time when inflation is close to our 2% objective." Mr Clarida also talked about the Fed’s balance sheet which is currently being reduced. He said he wanted to operate “with the smallest balance sheet possible while still achieving objectives." This was regarded as particularly hawkish as there has been recent speculation that the Fed may be happy to slow down its programme of quantitative tightening and leave its balance sheet close to where it stands now.

Fed Chairman up next

Tomorrow evening we hear from Federal Reserve Chairman Jerome Powell who will deliver a speech on "The Federal Reserve's Framework for Monitoring Financial Stability" at The Economic Club of New York. It will be interesting to see if Mr Powell’s opinion diverges much from his colleague. I’d be surprised if it does, although it will be interesting to hear if Mr Powell expresses concerns about the slowdown in global growth. Mr Clarida didn’t, and that surprised a few people. After all, the World Trade Organisation (WTO) has just followed the IMF and downgraded its outlook for global trade. On top of this, several analysts have pointed to the 30% drop in the price of crude as a major indication that global economic growth is slowing. But if Mr Powell indicates that the Federal Reserve is still on course to raise rates in December and 2019 as well, then the dollar looks likely to continue to strengthen. Meanwhile, stock market investors will be pinning all their hopes on a breakthrough on trade talks at this week’s G20. A failure there should only add to the downside pressure on global equities.
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