April 23 – Stock futures surged overnight, after President Trump stated that he has “no intention of firing” Federal Reserve Chair Jerome Powell. The VIX dropped back to trade near 28 overnight, which is its lowest level since April 3rd. The market has spoken, and President Trump has listened. The dollar index firmed to trade near 99.2. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 3.81%, as the yield curve narrows again. Crude oil prices are modestly higher, while the grain and oilseed markets are mixed. Soybeans are again modestly higher on White House comments that discussions with China are progressing, while corn and wheat prices are modestly lower on favorable weather forecasts for key growing regions.
The White House continues to speak of negotiating progress with a significant group of trading partners, but any mention of official negotiations remain absent regarding China, despite mention of informal discussions going well. Instead, President Trump continues to ramp up the pressure on China, trying to force them to the bargaining table. Thus, reciprocal tariffs on China are up to 145% currently, with a host of other direct and indirect tariffs and restrictions announced in recent days with the objective of slowly tightening the economic squeeze on that country. Trade has in essence shut down between the two countries, with the exception of electronics that are temporarily exempted – accounting for roughly 40% of the previous trade level. Otherwise, President Trump has put a lot of pressure on China. The question is, will that strategy work?
No leader wants to be embarrassed by another rival leader, and no leader wants to be in a position whereby it appears that he / she was coerced into doing something. President Trump put significant economic pressure on China that is certainly causing it to ramp up its debt, while creating fear among its consumers that keeps them from spending, while also discouraging foreign investors from channeling money into China’s economy. But President Xi Jinping has also watched President Trump’s tactics and listened to his statements. He likely fears that yielding to negotiations would make him appear weak to his people. He also likely fears that Trump could “move the goalposts” once those negotiations start, putting him in an even worse position. Trump has a history of doing that with other world leaders. My observation within China is that, while the current trade war is sincerely hurting it, there’s a despair that participating in negotiations won’t improve anything. Furthermore, there’s a belief in China that the trade war is hurting America as much as it is hurting China, if not more. I disagree with the latter, but that is a belief largely held within China at this point, reducing its incentive to leave itself vulnerable to negotiations.
In fact, the Chinese government believes that it has an advantage in the current standoff. That’s because it believes that Chinese citizens have deeper savings accounts for weathering the storm. Furthermore, Chinese leadership has been framing the trade war within China as a literal U.S. war on China, encouraging its citizens to unite and endure hardship in the name of nationalism and patriotism, similar to what we saw in the States during World War II. As such, President Xi Jinping has a lot of strong public support within China that makes him feel that he has an edge, particularly when he sees the strong domestic opposition to President Trump portrayed in the U.S. media, even from members of his own party. As such, Xi may feel that yielding to pressure to participate in negotiations would convey a weaker image than he currently enjoys within China. He fears that it would erode the people’s faith in his leadership in a time of war. Keep in mind that people within China only know what they’re being told, and they’ve been told that it’s the United States that has been a “bully” and it is the United States that has “unfair” trade policy. Xi’s defiance against that image is seen within China as him standing up for the vulnerable, which reinforces a sense of moral justification while strengthening his public backing.
A big part of yesterday’s stock rally, besides favorable earnings reports, emerged from comments made in a private meeting by U.S. Treasury Secretary Scott Bessent. He reportedly stated that the current standoff with China is unsustainable, and that he expects the situation to de-escalate soon. Later, the White House press secretary stated that the U.S. is “doing very well” in discussions with China. Does that mean that China is taking steps to de-escalate, or the United States? I do believe that President Trump has a well-thought-out plan. He may be the only one who knows what that plan is, but he is a smart man. I don’t take him as someone to initiate such an economic fight without a strategy. But any strategy that will work must be one that allows both parties to appear strong to their people at home as those negotiations begin and proceed to a favorable conclusion. Such a strategy becomes increasingly more difficult to conceive the more the tensions escalate, because it also means that each leader will be facing increasing scrutiny by those in his country as it occurs. The stakes are high. The opportunities are high as well, but navigating through this will be a challenge, and one that must be navigated sooner rather than later.
