How Trump's Attacks On Powell Led To Collapse Of China Trade Talks

In what will almost certainly be remembered as one of the most chaotic weeks for global markets in recent memory due to the unceasing flow of trade news, global stocks were back in risk-off mode Thursday after a seemingly offhanded remark by President Trump during a MAGA rally last night doused the sense of optimism that had prevailed earlier in the day.

But with the Chinese delegation having arrived in Washington, more reports published late Wednesday and early Thursday have offered new insights into why Beijing decided to play hardball, and how Washington is planning to show that it means business while stopping short of torpedoing any accumulated goodwill with new tariffs.

Trade

Though paperwork filed by the Trade Representative's office on Wednesday suggests that tariffs will almost certainly rise on Friday, the administration has apparently come up with an important caveat that could allow negotiators more time: The new tariff rates won't apply to goods already in transit, which would give negotiators up to a month to work out a deal before the new rates take effect, according to the FT.

The clarification offers US and Chinese negotiators a window of two to four weeks to reach a deal before the bulk of the pain from the higher tariffs hits US consumers and businesses, based on shipping times between the countries.

On Wednesday morning, Mr Trump noted on Twitter that Mr Liu was still coming to the US capital to "make a deal."

The president’s latest tweets were posted just before the US equity markets were set to open after two days of losses driven by the flare-up in trade tensions with China. US stocks were volatile but trading slightly higher on Wednesday compared to earlier in the week.

Meanwhile, in a lengthy piece purporting to explain why Beijing decided to start playing 'hardball' so late into the talks (though, to be sure, other reports suggest that Beijing had taken a hard line almost from the start), WSJ claimed that President Xi and the senior leadership interpreted Trump's attacks on Fed Chairman Jay Powell as a sign that Trump would be ready to compromise.

The reason? It was interpreted as evidence that Trump secretly believed the US economy was more fragile than the official data reflected. Meanwhile, the Chinese economy has stabilized, in part thanks to a massive stimulus program.

Beijing was further emboldened by Trump's professions of 'friendship' with Xi, and his praise for Liu. Then, an April 30 Trump tweet praising Chinese economic policy cemented this view, according to WSJ's sources.

An analyst quoted in the WSJ piece offers an apt summary: "Why would you be constantly asking the Fed to lower rates if your economy is not turning weak?"

That's a great question. We're still waiting for an explanation on that one.

A spokesman for MOFCOM on Thursday rejected US accusations that Beijing had reneged on its promises, which is what allegedly prompted Trump's tariff threats. Beijing has vowed to retaliate to any new tariffs out of Washington, but the takeaway from Thursday's reports is that even if a deal doesn't happen Friday (which it almost certainly won't), the trade negotiations will remain an intense market focus for at least the next two weeks, until the new rates take effect.

At any rate, we imagine the WSJ report was at least a small consolation to Powell, who has now been partially vindicated for his slightly hawkish tilt during the post-FOMC press conference earlier this month.