INSIGHTS

Maybe President Trump is a lot smarter than we think. Maybe he has orchestrated the escalation of the trade war with China exactly as planned, to create just enough uncertainty to box the Federal Reserve into a corner and get the interest rate cuts he has wanted.

Just think about it for a moment. Trump hasn’t been at all impressed with Jerome Powell and the Fed raising interest rates no less than five times over the past 18 months. In fact, he’s expressed this view publicly more than once, breaking one of the unwritten rules his predecessors have followed.

Just when it felt like talks with China were close to a resolution, and the US sharemarket had reached a new record back in April, the rhetoric ramped up. Now we’re back in a highly uncertain position, which has dented confidence in the US economy.

The ISM index, a key US manufacturing indicator, fell to a two-and-a-half year low last month, while the most recent jobs report saw hiring well below expectations.

Worries over the potential impact of a lengthy trade impasse have rippled through other regions as well. The export-driven German industrial sector has posted some ugly readings, economists have cut their global growth forecasts, and oil prices have tanked more than 20 per cent in the past six weeks.

As far as the Fed goes, Trump seems to have got his wish. Markets now see interest rate cuts as an inevitability. The likelihood of a cut at the July meeting is sitting around 75 percent, and market pricing implies further cuts over the coming 12 months.

The stand-off with China is a big part of this renewed nervousness, with markets getting edgy about how ugly the trade dispute could get. President Trump is playing hardball, but one suspects he ultimately wants a resolution.

Trump fancies himself as a master of negotiation. Delivering the American people a seemingly better deal on the trade front would allow him to claim victory over China, his biggest economic competitor.

Xi Jinping, Trump’s Chinese counterpart, is similarly motivated to reach some form of agreement. One could argue President Xi is in a better position to play the long game. There is no term limit on his presidency which means he could easily outlast Trump.

However, China has no shortage of domestic issues to deal with, and the added pressure of the trade dispute only adds to these.

The last thing President Trump wants is for the economy to slow sharply, or even worse, fall into a recession. While the US has less to lose if the trade war escalates, it won’t be immune. Growth will be dented, corporate profitability eroded, and consumer prices will rise.

Ideally, Trump wants to head into the 2020 election campaign backed by a strong economy, a buoyant sharemarket and evidence of his skill in the deal-making stakes. Low interest rates would help too.

It’s a fine line to walk, but if we see just enough uncertainty to force the Fed’s hand it might be just what the White House wanted. A temporary slowdown, a few interest rate cuts, then a solid platform to build on heading into 2020.

Throw in a China trade deal at some stage over the next several months and you have a recipe for a rising sharemarket, improving sentiment, and in all likelihood, re-election. Timing is everything, and what if this is all part of the plan?