One Less Rate-Hike Doesn't Trump A Trade War

Markets started the week trying to be cool, calm and collected, rebounding overnight in their ubiquitous BTFD way... but that didn't last long.

As former fund manager and FX trader Richard Breslow notes, the feel-good mood left over from Friday allowed traders to look past some fairly ugly headlines.

Score one for a dovish repricing of U.S. rates over some sharply barbed comments by Vice-President Mike Pence aimed at China.

But, as Breslow points out, that very fact is both telling and worrisome.

Via Bloomberg,

Assuming away tighter U.S. financial conditions while figuring that the trade and hostile geopolitical rhetoric is just part of some game theory plan to allow a tour-de-force of statesmanship to be pulled off at the upcoming G-20 misprices both sides of the equation.

This Fed consistently attempts to remind investors that they are not on auto-pilot. That gets interpreted, or misinterpreted, depending on the current atmosphere and how the various speakers choose their words. They don’t always communicate with flawless clarity.

If only they could get to the point where they were believably able to convince traders, and themselves, that they are indeed data-dependent and are not willing to simply be boxed in by commitments beyond what current information reliably shows. Why we must incessantly debate what rate decision will be made over a year from now is beyond me. They shouldn’t feel the need to prove they are omniscient. I’d much prefer demonstrations of common sense. Facts do in fact change.

And of equal importance, they need to force traders to begin again to make their own investing decisions. Too many people hang on their every word not seeking insight but waiting to be told what to do. Forward guidance has outlived its usefulness to all concerned. And creates unnecessary and noisy volatility with each perceived subtle change.

Having said that, the base case remains that they still have a predilection to get rates higher and the balance sheet lower. In baseball, ties go to the runner. Despite what was said recently, ties, for now, will still go to staying the current course. The appreciation of which has been seeping out of asset prices. Which is fine as long as it isn’t taken to an extreme. Still, it could very well be that this becomes a theme for the last part of the year. But it assumes a lot.

If you believe in a Fed that is rotating to a dovish tilt based on global headwinds, then you probably should assume something else will go badly wrong. Which suggests you need to be very selective in the asset classes and regional securities you choose.

As far as stirring up geopolitical tensions at yet another global meeting, it’s a very dangerous strategy. It creates serious risks in a realm where mistakes can lead to really bad outcomes. The entire world would be better off if we could achieve the impossible -- that people could reasonably expect that world leaders are saying what they mean. Unfortunately, what has been bandied about recently makes me glad that I haven’t made that leap of faith.