ALERT: The CA Vacation Alert is in effect for next week. It looks like it should be a slow week (for both data and news). I usually pick my vacations on weeks that look slow, but the Trading Gods don’t seem to care.
Last week, I wrote “However, it’s not clear the damage hasn’t already been done. As a result, playing for cheap deferred eases makes sense.” The Blind Squirrel strikes again! I wanted to discuss my Powell thoughts this week. The “Trump won the Battle but lost the War” post will have to wait another week. But first, a recap of the week in news:
· We basically got nothing from Georgia Meloni (Italy). It sounded like they were far apart on tariffs, as the next meeting didn’t seem very close. The problem with a 90-day deferral is that there is no urgency to act - especially when China’s patience is forcing Trump to reveal the weakness of his position. It’s not clear if the trade uncertainty will be resolved any time soon.
· It does seem like China is willing to work with the Trump administration. However, contrary to Trump’s claims, I doubt anyone meaningful from China called. [cue Carly Rae Jepson, “Call Me Maybe”] It’s unclear how long this “you call first” game is going to go on. However, most of our supply chain tail risks center around China. Ford was out saying they were suspending shipments to China. Those shipments take up space and eventually jobs if an outlet can’t be found.
· Trump said Japan was talking about a TRILLION dollars of investment in the US. The markets barely reacted to this, because at this point we all know Trump exaggerates. While this is an impressive-sounding number, most of this (assuming true) is probably: (1) amounts they already spent recently, (2) amounts they were planning to spend anyway, (3) an amount they were thinking of spending in the distant future anyway, (4) a fictitious additional amount to satisfy Trump that they don’t have to fulfill, plus (5) a fictitious amount Trump decided to round up to. The reason I know this is because this was the composition of a bulk of “investments” Trump got from his last term of “dealmaking.”
· I saw a headline about the White House urging SLR changes (to presumably prop up Treasury market). At this point, I would think SLR reform would be mostly priced as an eventuality. Bessent wants a Treasury bid for auction sizes that will eventually have to increase.
· Powell and Waller seemed to have slightly differing views of the balance of risks when facing higher inflation vs lower growth. Waller implied he leaned towards easing while Powell uncharacteristically sounded hawkish and focused more on the inflation mandate. I’m not sure they are miles apart. I think once the data present themselves, it will be obvious which way they have to move. Right now, they are just guessing what things will look like a few months from now, and there just isn’t a lot of clarity.
Trump mentioned wanting to replace Powell. I see a near-ZERO chance of Powell being replaced this year. Why? Because he needs someone to blame for anything that goes wrong! Take a step back and look at Trump’s M.O. He mentions Biden at least 3 times an appearance as a catch-all of blame. But whether it’s immigrants, Zelensky, the Chinese, any of our allies, etc. he always has someone who is at fault for your problems. Sounds familiar from the Dictator Playbook, but I’ll just leave it at that.