We get April retail sales, Empire State manufacturing, and industrial production this morning. Retail sales are the important number and likely a big slide from 1.6% in March to only 0.2%. We also have a couple of Fed speakers.

Trump wants us to think he has control of the China trade war, but if no talks are taking place, nothing the White House says is meaningful or true. Bloomberg reports four-fifths of economists it polled “see a further escalation of tariffs increasing the possibility that the U.S. economy could slip into recession by the end of next year.” The dire outcomes are going to hit the farm belt and the rust belt the hardest, i.e., Trump’s base. Trump is politically savvy so has a big fat incentive to get something done, even if it consists of a giant US capitulation at the G20 meeting in Osaka. That might appeal because he can spin the deal as having been made possible only by his personal deal-making touch.

It goes without saying that Trump mismanaged the trade war from start to finish. A better method would have been to form a coalition of aggrieved China trade partners—including Canada, Japan and Europe—to take on China as a bloc. That would be one case in which Trump dumping an international organization, the WTO, would have made sense. But this White House has no end game. Still, we continue to think the outcome this time will be similar to the outcome last time—a new deal, albeit with less for the US than trumpeted. Most analysts seem to think China misjudged but China learns from mistakes, unlike Washington. It’s going to give up one thing… wonder which one?

Trump will then declare victory and go on to auto tariffs.

As for Trump harrying the Fed, the smart response comes from Kansas City c George, who said cuttizng rates could lead to a bubble and eventually a downturn. Yes! There’s no need for an interest rate cut even with low inflation. The Fed’s rates are not the threat to the US economy—that would be the China trade war and global slowdown. George is not worried about inflation at 1.6% (the PCE version). Maybe George is transforming into Yellen, who was the top straight-shooter at the San Francisco Fed in her day. Note we get the Atlanta Fed business inflation forecast today plus a revision to the GDPNow (1.6% last on May 9). We should expect the messy, fact-free trade war talk to continue to support havens, especially the dollar. But elsewhere, the FX market is a little befuddled by developments in two currencies, the CAD and AUD. The Canadian dollar is flaky and may get flakier after CPI today. The BoC will or will not cut rates this year, depending on which day of the week it is. We say the US will be cutting and so Canada must follow, but that’s a minority view. Australia—holding an election later this week—is also a bit messy and uncertain. With China showing likely falling demand for Australian exports, it’s hard to see a meaningful rally. But the unemployment report comes out overnight and the AUD is oversold. Currency divergences can be revealing… when the euro and pound are down but the CAD and AUD are fighting back against a rout, sometimes it means something.

Tidbit: We got some responses from our comment yesterday that the nuclear option—China dumping Treasuries—will drive the dollar down. Mechanically, the amounts that can get done are actually fairly small. Yes, the minute China is seen selling, prices fall and yields rise, but even if they did a big amount like a few hundred million, this is a drop in the bucket in FX. The dollar doesn’t necessarily go south. Ah, but that is to assume other players do not see it’s China doing the selling. In this context, China is to the dollar as Soros was to the pound. In any case, the nuclear option is not likely until after the Trump-Xi meeting in June.



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