4 Reasons To Expect Even More US-China Trade (And Currency) War Escalation
As we noted earlier when summarizing some of the more notable Wall Street reactions to China’s jarring trade war escalation, we highlighted the take of Morgan Stanley’s chief US public policy strategist, Michael Zezas, who said that he saw incentives for the U.S. to escalate quickly. Specifically, referring to the now viral chart of the circular dynamic of Trump-Powell interaction…
… Zezas said that if the administration understands the Fed’s trade policy reaction function – which it clearly does after it unleashed a new round of tariffs less than 24 hours after the Fed’s rate cut which has the market now pricing 33% odds of 2 rate cuts in September (see more here) – then it may also perceive that a more rapid escalation could deliver one or more of three beneficial points ahead of the 2020 election:
- A quicker, potentially more aggressive Fed stimulus response that could help the economy heading into the election;
- More time to re-frame the potential economic downside; and
- A major concession by China (not our base case, but it is, of course, a possibility).”
“The dynamics of U.S.-China negotiation and macro conditions mean the next round of tariffs will likely be enacted, and investors are likely to behave as if further escalation will follow in 2019 until markets price in impacts,” Zezas wrote. “This supports our core view of weaker growth and skews the Fed dovish.”
Zezas also highlighted several key global trade risks amid the rising geopolitical uncertainty, which he expects to keep rising:
- WTO Courts at risk
- US/EU confrontation set to intensify
- Nov 15th auto deadline
- OECD negotiations
- US/China resume escalation
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