Monday, March 4, 2019

This Morning's Log Entry

This week’s important data releases (construction spending, ISM Services, new home sales, Beige Book, jobs, etc.), barring any huge surprise in the jobs number, will be overshadowed by trade headlines. Domestic politics will continue its steady stream of sound bites that have, thus far, been ignored by markets. Asian markets closed higher, although well off of their overnight highs, U.S. equity futures are set to open higher.

According to last night’s Wall Street Journal, a China trade deal is in near-term reach. While that is absolutely in both sides immediate best interest, there remains real risk that the most penetrating demands by the U.S. will not be easily-stomached by China. Reducing or eliminating tariffs and foreign investment barriers are easy, and, actually, consistent with China’s stated goals pre-trade war. I even think the IP theft and forced tech transfer issues are largely resolvable as well. However, the idea that the U.S. will be allowed to monitor, critique and approve/disapprove of China’s monetary policy going forward is one I don’t see Xi submitting to. Other structural change the U.S. is looking for – such as a curtailing of China’s use of state subsidies – has to feel overly intrusive as well.

Then of course there are the at-home political realities for Xi. He’ll stop somewhere short of giving, or appearing as if he’s giving the farm to the U.S.. Instead, he’s hoping that supporting U.S. farmers – hugely important to Trump – will be enough to get a deal done while maintaining sovereignty over monetary policy and economic management going forward.

Odds clearly favor a deal, but in my view only one that won’t require such relinquishment on the part of China.

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