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Macroeconomics

04 July 2019

You cannot have your cake and eat it 

‘Europe and China are playing big currency manipulation games’ tweeted President Trump.

The tweet came on the heels of a degrading trade deficit. Part of the promise the president made before being elected was to wipe out the trade deficits the US has with other nations. These were proof of unfair competition. This has not gone according to plan. The reason is very simple and it follows economic textbook rules. If one country outgrows other nations on a relative basis, then, all things being equal, its trade deficit will rise as imports outpace exports, because domestic demand is relatively larger as well. Nevertheless, the president vowed ‘to match’ these manipulative measures. The question is what can he do?

Unless there is concerted action between the trading blocs to simultaneously weaken the greenback, it is unlikely the US Treasury can manage things on its own simply because this forex market is too big. Besides, with the US being the only high yielder within the G10, money is being sucked towards the dollar. Trying to weaken the USD would imply much lower rates but these would be the result of falling activity, otherwise the Fed won’t cut. But the president wants to be re-elected on the basis of strong equity markets and a strong economy. A classic example of ‘you can’t have your cake and eat it’.

But for now President Trump is getting what he wants from equity markets. The S&P500 is just a whisker away from the 3000-level, another mouth-watering record high. Meanwhile, bond yields continue to head towards new lows. Investors increasingly need to pay up for holding government bonds as the yields plunge deeper into negative territory. By definition, all other assets, uncorrelated to the economy, that pay nothing become more attractive, like gold or bitcoin.

Since its 4 July, there is no macro-data to be expected today. There will be tomorrow as the jobs report is issued. The ADP report came in below expectations but was still higher than the past, upwardly revised, May figure. The figure from the Bureau of Labor Statistics is expected to come in at 160,000. Comparing with the ADP data, this might be too high. We’ll see.