After a long week of optimistic, market-pumping trade-deal headlines, updates over the weekend didn't offer any of the specifics that analysts are so desperate to hear (so long as they affirm the narrative that talks are going - as President Trump put it - "very, very well"). To wit, little detail has been provided regarding last week's big "breakthrough" (Beijing ceding to US demands to "stabilize" the yuan), and it's still unclear how such an arrangement would be enforced.
And the information that has dribbled out - including a report about a growing rift between Trump and Trade Czar Robert Lighthizer - suggests that maybe the market's euphoric reaction to Trump's not-at-all-consistent performance on Friday was somewhat premature.
However, before the market even had a chance to reassess the implications of Friday's exasperating public spat between Trump and Lighthizer with this newfound context, Trump announced Sunday night (just 20 minutes before futures opened) that he would be delaying the March 1 tariff deadline following "substantial progress" in the weekend talks, and would plan a summit with president Xi at Mar-a-Lago to conclude an agreement - news that should help pump the S&P 500 back over 2,800 as algos first buy the rumor, and then - just to be safe- buy the news too.
I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these very......— Donald J. Trump (@realDonaldTrump) February 24, 2019
....productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!— Donald J. Trump (@realDonaldTrump) February 24, 2019
While the market rejoiced at the delay, one twitter wit offered this troubling analogy:
Timing by Trump delaying tariffs 15 minutes before futures open reminds me of all the times good news was pushed out on Sundays during 2008 crisis --— north hero fx (@northherofx) February 24, 2019
While many were initially puzzled by the brief argument over relying on MoUs in the negotiations (it was later revealed by WSJ that Trump was simply parroting an argument by Fox News host Lou Dobbs that an MoU "isn't worth the paper it's written on"), Bloomberg published an anonymously sourced report on Sunday revealing that the rift between Trump and Lighthizer has been growing for some time.
And that Lighthizer's display of impertinence on Friday might have been the last straw for Trump.
President Donald Trump and his top trade negotiator, Robert Lighthizer, have grown increasingly frustrated with each other as a China trade deal stays elusive with a key deadline less than a week away, said people inside and close to the administration.
After Friday’s exchange, said two people familiar with the events, the president complained that Lighthizer had embarrassed him by publicly correcting him in front of the Chinese delegation and the press. The president also expressed frustration that Lighthizer hadn’t yet stitched up a deal that Trump views as increasingly important.
Talks between Lighthizer and other senior U.S. officials and Xi’s special envoy, Liu He, continued on Saturday and were due to resume on Sunday. In a post on Twitter, the president said Sunday that the weekend talks have been “very productive.”
Friday's public disagreement wasn't the first indication that Trump and Lighthizer might not be on the same page. Earlier this month, reports surfaced suggesting that Lighthizer - who had insisted that the March 1 tariff deadline was a "hard deadline" - had opposed extending the trade deadline (though that's out the window now).
Very productive talks yesterday with China on Trade. Will continue today! I will be leaving for Hanoi, Vietnam, early tomorrow for a Summit with Kim Jong Un of North Korea, where we both expect a continuation of the progress made at first Summit in Singapore. Denuclearization?— Donald J. Trump (@realDonaldTrump) February 24, 2019
The reason Lighthizer and other China hawks in the administration are putting so much pressure on Trump to stick to his guns when it comes to structural reforms and IP theft is that they're afraid he might squander the leverage he has built up with his tariffs, which have had an asymmetric impact on China's economy.
The way they see it, Trump has China on the ropes. Now is not the time to start pulling punches. But they fear that Trump's fear of upsetting the market would be massive tactical mistake in the long term.
Other China hawks in the administration and in Congress, however, have been more open about their frustration.
They worry that, having built up considerable leverage through his tariffs, Trump has become too focused on cutting a deal to calm financial markets, and that any agreement may fail to address core issues such as intellectual property theft. The concern is that a deal could end up seeing only a short-term increase in Chinese purchases of U.S. agricultural and energy products.
"No matter how many tons of soybeans they buy if China gets to keep cheating & stealing trade secrets it won’t be a good deal for America, our workers or our national security," Republican Senator Marco Rubio of Florida tweeted on Friday after Agriculture Secretary Sonny Perdue said China offered to buy 10 million tons of soybeans as talks continued.
Citing an anonymous source with close ties to the administration, BBG revealed some new details about the genesis of the conflict between Trump and Lighthizer that are extremely germane to what's happening today. During the days after Trump's landmark meeting with President Xi in Buenos Aires - where the two leaders first agreed on the trade truce - Trump tasked Lighthizer with managing the talks. At first, Lighthizer rejected the assignment, telling the president he didn't think the Chinese were ready.
Trump promptly ignored Lighthizer's objections, and insisted that a deal had to be made.
On the flight back from the leaders’ Dec. 1 dinner in Argentina, at which a 90-day truce was agreed, the president tasked Lighthizer with getting a China deal. When Lighthizer told him that he believed Beijing wasn’t ready to make meaningful concessions, Trump insisted a resolution had to be found, according to one person briefed on the exchange.
Mnuchin and National Economic Council Director Larry Kudlow have been making the case to the president that investors expect a deal, and not getting one would cause U.S. stock markets, which have started the year strongly on trade optimism, to stumble again, according to people familiar with internal deliberations.
They’ve also advised Trump to hold off on issuing an executive order that would ban Huawei Technologies Co. and other Chinese telecoms equipment from U.S. networks for fear taking action against Chinese companies would undermine the trade negotiations.
Assuming the report is accurate and that conversation really did happen, it's unlikely that Trump has changed his mind over the past two months. Because that conversation took place before the explosion of cross-asset volatility that made 2018 the worst year for financial markets since the crisis. And during the weeks that have followed, Mnuchin and Kudlow have had plenty of time to scare Trump into hardening his position, by warning that failure to secure a deal would be disastrous for the stock market, which Trump sees as a gauge of his performance.
In summary, as the divide between Lighthizer (who wants the best deal or no deal) and Trump (who would be willing to accept any deal that would allow him to save face) widens, and Trump grows increasingly frustrated with his trade rep's perceived overzealousness, a serious conflict is inevitable.
But regardless of what comes next, it's still worth considering: How would markets react if Trump relegates Lighthizer to a secondary role in managing the talks, and elevates Mnuchin or Kudlow in his stead? Or better yet, if Trump fires Lighthizer in a fit of pique? While an initial bout of panic would be understandable given the market's sensitivity to anything that seriously challenges its preferred narrative of optimism, would traders quickly come around to the notion that, by removing Lighthizer, Trump has removed the biggest obstacle to deal?