Trump vs. Powell
Featuring Joseph Trevisani
Published on: August 26th, 2019 • Duration: 12 minutesJoseph Trevisani, senior analyst at FXStreet, breaks down President Trump’s response to Jay Powell’s speech at Jackson Hole. In this interview with Jake Merl, Trevisani highlights the current dynamic between the trade war and interest rates, walks through the knock-on effects of a prolonged trade dispute, and reviews his outlook for the U.S. dollar. Filmed on August 23, 2019.
JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down with Joseph Trevisani, senior analyst at FXStreet. Joseph, great to have you back on the show.
JOSEPH TREVISANI: Thanks for having me. It's always fun to be here.
JAKE MERL: So earlier today, we saw Chairman Powell give his speech at Jackson Hole. And immediately following the speech, President Trump came out with a tweet storm and basically posed the question, is Powell a bigger enemy than President Xi? So what do you think, Joseph, is Powell a bigger enemy than President Xi?
JOSEPH TREVISANI: No, I don't think so. But Mr. Trump is in the midst of trying to change a trade policy that's generational, basically. And from his point of view, the stronger the US economy is, the better his and the United States' bargaining position with China. China is proving extremely resistant to change. You might say that's internally, as well as externally in trade policy. But we'll leave the internal positions aside.
So from that point of view, a consumer economy in the United States, which is really the only thing that's running right now, business investment, business sentiment, hasn't quite cratered. But it's certainly crashed from where it was late last year. For the first year of the beginning of the trade conflict with China, from the beginning of 2018, there was relative optimism, both from the United States and from China, that it only makes sense that this should be settled. So of course, it is more beneficial for both countries if this wasn't going on, and we had a better trade relationship right now. But that doesn't obviate the fact that each side has interests, which is it's unwilling to give up.
So given that background, what the president wants is a stronger US economy. With, as I said, only the consumer sector really running right now, the labor market is good. Wages are good. People are spending. The last five or six months in retail sales have been good, 6% average adds 0.64% in the control group, which feeds into GDP.
So given all that background, would a looser fed, more accommodative, help the US economy and the consumer, the consumer economy? I think you'd say, have to say, yes, it does. How much? Hard to say. But it certainly would.
So I think that's where President Trump is coming from. However, posing it that way is provocative, deliberately provocative. It gets attention. And he seems to be unable not to get attention. So is Xi a greater enemy? Yes, I would imagine he is, or at least a greater opponent. The fed certainly is not. The fed's concerns are not overtly political. This is not their responsibility, by and large, to conduct trade negotiations, which what Mr. Trump is trying to-- is doing. So although I can have some sympathy for the point of view, the tweet was deliberately provocative, as I said, as of course, Mr. Trump is, period.
JAKE MERL: So it sounds like, basically, what you're saying is that Trump may be correct that lowering interest rates will help economic growth, which will give us a better footing in this trade dispute. But he's taking it a step too far by comparing Powell to Xi. Is that right?
JOSEPH TREVISANI: Well, when it comes to his media interactions, taking it a step too far is pretty much standard procedure. So it's the old no publicity is bad publicity idea. I mean, from a media point of view, he dominates the media with quotes like this.
And does it bring about the conclusions that he wants? That's certainly open to debate, as they would say. If you're looking for a positive conclusion to the trade war with China, I don't think you're really going to get a lot until we have the decision on the last election. At least, that's the way it looks now. Both sides have dug in their positions. Both sides have points of view that they're not willing to surrender.
But more importantly, both sides feel the time, assuming Mr. Trump gets reelected, time is on their side, as far as his determination goes. It may be that the Chinese are hoping that Mr. Trump may lose, in which case they might say, time is on their side. The US will be saying that the effects of the trade war on China are much more profound on China, simply based on the imbalance in trade.
I mean, we are going to put on 10%-- although, we took some of it off, so just say 10%, say, originally-- on the remaining $300 billion of Chinese goods, September 1st. Well, China's reaction is $77 billion. Because there isn't that much of the United States exports going to China. We are not, by and large, an economy that's dominated by exports. We're an economy that's dominated by the internal market, which is the largest in the world. So you have two very different points of view, both of which are relying on the passage of time to make their position stronger. That's a recipe for a great deal of turmoil in the markets over the next year and a half.
JAKE MERL: So what would you be expecting in markets? What are some of the knock-on effects, if we don't get a trade war resolution?
JOSEPH TREVISANI: Well, we've seen one already, of course. And that has been the decline in business spending and business sentiment here. The global knock-on effect is that there are many nations out there which really do depend on exports. Look at their latest numbers out of Germany. Well, if Germany then goes into recession, it will probably drag down the EU.
The EU has its own problem in Brexit, but that's much more immediate. That's only to Halloween. Here, with China and the United States, the two biggest economic blocs in the world, at loggerheads and whose growth has slowed-- China's certainly has, and so has ours. It doesn't mean that our growth will decline to 1% or 0.5% or go into recession, but it certainly has declined. There's no doubt about it. China has prima facie in the numbers, in the Chinese numbers, their own numbers, which are probably overstating the case, on the upside, meaning that they're growing less.
You also have Europe, the EU, and Britain heading into a conflict, which is only going to generate economic problems there, as well. So if you have the three biggest economic blocs in the world heading into problems, then the idea that this isn't going to continue to exacerbate the problem until the origin is solved is foolish. So you will have an increasing drag, I think, on global growth. That's the main knock-on effect. I don't see how you can avoid it.
JAKE MERL: And so what about a fed rate cut? Could that alleviate some pressure?
JOSEPH TREVISANI: It will alleviate some pressure. Because, I mean, the US is still the global destination for exports. And so if it ends up supporting the US consumer and keeps the labor market running at it's relatively hot pace, as it is now, then not only will that benefit US manufacturers, but they manufacture only about 12% to 15% of the US GDP. So it will also benefit everyone else who exports to the United States. It will even benefit China, which exports to the United States-- although, of course, the tariffs are a problem for that.
So yes, it would. And you can make the case that if the fed cuts, other central banks will follow. I don't think you have to make a case. I think it's pretty obvious that that's true. So if you start something like that, you will get a knock-on effect as far as rates go around the world.
I think that lower rates will be far less effective in the EU, mainly because of where they are now, and in Japan, because of where their rates are now. I think you pretty much lose most of the economic benefit of rates when you're cutting or heading negative. I don't think that makes a lot of sense as a spur to growth. And it certainly hasn't proven to be so. But still, the relative effect would be more than if it doesn't happen. Does that mean it's as much as it would if we were at 3% or 4%? No, of course not.
JAKE MERL: And so based on Powell's speech today, do you think we're going to get a rate cut in the next FOMC meeting in September?
JOSEPH TREVISANI: I think we will. I think we'll get a 25% cut, a 25 basis point cut, in September. And I would say there's a very good chance you'll get another cut in December. So once again, the credit markets will have been proven correct in their assessment. Because remember, the treasury rates started falling in early November. That was almost six weeks before the fed's last rate increase. Treasury rates were going down. The fed was still raising rates. The developments over the past year have been a justification for the moves in the credit markets.
JAKE MERL: So tying this back into trading and investing, what's your outlook for the US dollar? I know you've been bullish on the dollar for the past year. You've been bearish on the euro. And that thesis has played out quite nicely. Do you still like betting on the dollar here, given Powell's recent speech?
JOSEPH TREVISANI: Yes. And there are two reasons. The first one is, that if the fed continues to lower rates, so will everybody else. And two, we're heading, I think, into a period of turmoil. And when you get concerns, especially rather not quite existential concerns, but serious concerns about the overall health of the global economy, it boosts the dollar. Because people look for the safety of treasuries.
And after all, if you're comparing US treasuries to other industrial, Western industrial, nations or Japan or government bonds, government notes, is there any comparison? No, there's none. You come here. So that also ends up boosting the dollar.
JAKE MERL: And so I know last time you were here, you were looking for the euro to hit about 105 by the end of the year, versus the dollar. Do you still expect that to play out?
JOSEPH TREVISANI: I do. I'm not going to give up on it just yet. I mean, the euro has been extremely-- well, the dollar and the euro really haven't moved that much. We've seen a slow decline to below 110, and then it came back. Now it's back above 111 today. There isn't enough of a trend move to promote one way or another. The global economy's not so bad that people are fleeing to the dollar wholesale. The fed is still undecided about rates.
So the markets have an entirely priced in either what the fed is going to do or what the credit, US credit, markets say it's going to do or what the responses are going to be from the ECB, from the Bank of Canada, from the Bank of England. So all of that is still undecided. There hasn't been a trend development, where decisions are made, now we're going to continue to move forward until we get the results we want. So the markets haven't really moved that much. But I still think that the potential developments favor the dollar to the end of the year.
JAKE MERL: Well, Joseph, we'll see how it plays out in the months to come. Thanks so much for joining us.
JOSEPH TREVISANI: My pleasure. Thanks for having me.
JAKE MERL: So Joseph is still bullish on the dollar. Specifically, he thinks the euro could hit 105 by the end of the year. That was Joseph Trevisani of FXStreet. And for Real Vision, I'm Jake Merl.