On August 1, following a disappointing 25 basis points (bps) cut as opposed to a 50 bps wish, President Trump decided to shock the market (or rather Fed Powell) by saying he would impose 10% tariffs on the next $300 billion worth of Chinese goods, as retaliation for China not agreeing to buy more U.S. agricultural goods. It was just another bullying move to try and coerce China to "give in" to U.S. demands.
To Trump's ignorance, this bullying tactic did nothing other than crash his precious S&P 500. It fell 8% last week, threatening to break the key 2850 support, rallied, but barely held onto it. Yesterday, out of nowhere, we get another random tweet from Trump saying that the "U.S. is delaying imposing tariffs on some goods from China until December 15 because of health, safety, national security and other factors." Markets and stocks rallied back. It wouldn't be a surprise if Trump had a hedge fund of his own offshore managed by a third party, as clearly, he has the power to move markets up and down as he wishes -- the truest form of arbitraging the system! Given his dubious history, it is entirely possible. So, what really caused that turn around?
Ironically, yesterday Core Consumer Price Index (CPI) data for July were released, with CPI coming in at 1.8% vs. expectations of 1.7% and Core CPI printing 2.2% vs. expectations of 2.1%; a slight upward tick. Dare I say it? Could Trump's involuntary-spasm-induced tariffs finally be hitting the average U.S. consumer?
It was inevitable, as it was not long before U.S. companies would pass along increased tariff costs to the customer, despite Trump claiming "we are winning billions of dollars every day from the Chinese." Clearly the man has no notion of how trade tariffs themselves work.
Trump needs the average Joe to feel how "great" America is -- and higher prices would not help. More importantly, the Fed would not be able to justify cutting rates by 25 bps -- let alone 50 bps -- in the near future if inflation is nudging higher! That does put a spanner in Trump's master plan. At this rate, the U.S. economy would be steadily heading down a stagflationary path: lower growth and higher inflation -- the worst environment for equities and risk assets in general.
Taking a deeper look at the products on the list where tariffs will be delayed until December, that list comprises 75% or more of products the U.S. imported from China in 2018. The U.S. needs this for their consumer base. Now if China really wanted to tighten the noose on Trump, this would be the perfect time to do so, as the U.S. needs China a lot more than it thinks it does. After all, China is already embarking on plan B, moving away its minuscule imports from the U.S. and sourcing it from other countries.
Earlier, Trump could be seen as standing firm against China, but this recent flip-flopping over the last few months is only losing him credibility, both amongst his supporters and certainly vs. China. Rather than extend an olive branch, this tacit ceasefire has convinced China that playing hardball has worked, as Trump concedes at the first sign the U.S. market or data looks shaky. The ball is really in China's court. All Chinese policymakers have to do is dilly dally for another year, because that is Trump's deadline for re-election. He needs a win to save face. Do we really think China will acquiesce to all Trump's demands in September when they meet? Think again.
This morning China released its July industrial production numbers that showed a huge miss printing at 4.8% vs. expectations of 6%. Retail sales also missed coming in at 7.6% vs. 8.6% expected and prior print of 9.8%. The recent growth numbers have slumped and steel production has fallen, as seen by falling steel and iron ore prices down from their highs. Make no mistake, China is slowing down. Its large credit injection in the first quarter of 2019 did nothing other than inflate markets temporarily to then see them fall again. There have been local bank failures in China and its entire system is built on debt and leverage to the U.S. dollar. It is trying to move away, but will take time. It has a difficult task to balance its capital outflows, manage FX reserves and stimulate the economy, but all that is based on an export-driven model.
This is not an investor's market at all, it is a trader's market. It has paid traders to short at highs and buy when markets retreat towards their key 200-day moving average market trend line support. The market is still dictated by algorithm trading strategies. Until their market signals a red, indicating a trend has broken, we will continue to see traders buy the dips at the low end of this range and short at upper end. September will be eventful -- fourth time's a charm? The markets have been flat for the last 18 months, but boring they have not been.
For now, we seem to have bounced miraculously off the 2900 level in the S&P 500, with the technology sector once again leading the way -- for good reason, as it's the only sector showing any growth at all. Is it time to buy commodities and China-focused cyclical equities like copper, iron-ore, and steel? The jury is still out.