The No-Deal Deal with China Means Import Prices will be on Fire for a Long Time!
Markets are burning up ... in the wrong way.
Treasuries finished climbing solidly above a 4.5% yield on the 10YR and held above that through the end of the day (4.54% as of the writing of this editorial). That’s almost a three-month high. Not too surprisingly whenever the main benchmark Treasury yield gets into this zone, the S&P joined the Dow today in performing poorly, beneath its opening floor for parts of the day but finally closing just above flat. So, was the S&P’s roughly 80% rebound from its Trump-Tariff plunge just a big bear bounce? I think so because there is a whole lot of bad news in store from tariffs that the US stock market has not priced in as the helium-inflated heads of investors started to shop again in the nose-bleed section of stock pricing.
After all, for the Dow, what we just got was a 65% retracement of this year’s plunge— just passing, but then breaking back below the major level of final resistance on the Fibonacci scale. That appears to be where the market has stalled. If the market fails to break through the 61.8% retracement level and hold, that supposedly means the relief rally has finally failed and it will go back down to its recent bottom. If, on the other hand, it breaks above that final band of major resistance and holds, it’s supposedly headed to match up to its last all-time high or rise above it.
This looks like a test that failed, but I’m far from an expert in Elliott Wave theory (and those who know it better can correct me in the comments below because I don’t generally pay much attention to it, as I am not in the stock-prediction business). When I rarely make predictions of a market crash it is solely by looking at the pressures economic realities will place on investor sentiment because it is the overall economy that I write about. That doesn’t tell an investor when it is safe to get back in the water, but it’s been highly accurate for warning my readers about when it is a good time to be out of the water.
Right now we are far from done with the tariff tumult, so I continue to think this is not a good time to be back in the water in a burning boat. In fact, our troubles are barely getting started. We still have to see what happens to stock and bond markets due to all the remaining bad news out there that will keep burning through valuations and consuming sentiment as the actual effects of the tariffs on the consumer economy start to show up visibly this summer. I expect the stock market to burn down to the waterline and Treasuries to be enflamed to higher yields on US debt.
For the S&P, however, this rebound put it above that Fibonacci level as well back to even from where it started the year. The fact that stocks rose that much only because of what many are calling a no-deal deal with China due to the momentary relief the Trump “pause” brings from a total trade embargo tells me the market is running on nothing but fumes. Its rise was based on hope that the bad news has turned a corner; but the only good news from this no-deal deal was that the US decided to switch to a smaller hammer while continuing to pound itself on the head for the next ninety days with higher prices on just about everything it imports … with a promise by Trump to raise tariffs more at the end of that period … just not as much more as he recently raised them.
True, there is relief in going from a sledge hammer to sizable ball-peen hammer; but, for now, our head is still using an anvil as a pillow, and we’re still hitting it:
Former Treasury Department Secretary Larry Summers said Monday that there was no question that President Trump blinked when it came to the recent agreement on a 90-day pause between the United States and China on most tariffs….
“I think it’s very clear that it’s President Trump who blinked…. We had said that we were determined to impose these policies for an indefinite period…. China didn’t make any consequential or significant change in its policies…. “Now look, sometimes it’s good to blink,” Summers told Hunt. “When you make a mistake, it’s usually best to correct it and retreat, even if it’s a little bit embarrassing….”
The White House mouthpiece put it a little more positively, of course:
“This is an extraordinary first step in the right direction, and thanks to the strength of President Trump, Secretary Bessent and Ambassador Greer, we’re able to cut this initial deal with China,” Leavitt said on Fox News’s “Fox & Friends.”
Thank goodness for the strength to back off before the damage almost immediately became all-out catastrophic for the US, given its enormous dependency on Chinese trade for almost everything. Even the things we supply for ourselves from domestic production would go up in price a lot, due to lower competition under the effective embargo, and we would likely still wind up with shortages even on the things we can produce, if we took out all of the Chinese supply on those same items. It’s unlikely our own producers could make up the full volume of those goods lost from China anytime soon.
However a 50% total tariff level on China doesn’t clear those risks.
China’s official take is, of course, a little different than Press Secretary Leavitt’s:
Chinese President Xi Jinping said that “bullying and coercion only lead to isolation,” without naming any country in particular, to an audience that included the presidents of Colombia, Brazil and Chile.
The big story
As CNBC spells it out,
The world got a taste of an effective U.S.-China trade embargo, and after a breakthrough on Monday with lowered tariffs, there’s no going back. China now has the “mutual respect” it has long craved from the U.S.
U.S. Treasury Secretary Scott Bessent told CNBC’s Joe Kernen that “there is a sense of mutual respect” during the talks, a point that U.S. Trade Representative Jamieson Greer also emphasized in his remarks to the press on Monday.
That’s in stark contrast to how the first high-level bilateral meeting under the Biden administration kicked off with an exchange of insults in Alaska, followed by a “balloon incident” that delayed then-U.S. Secretary of State Antony Blinken’s first visit to China for months….
What’s also rare is that on Monday, the U.S. and China released a joint statement.
So, at least, Team Trump is now acting more civilly than the dementia-headed Biden Bunch.
Regardless, for US businesses, we’ve entered a brave new world now that almost everything is tariffied (and will be for as long as Trump is president—10% being the new “universal floor” as in bottom level for almost everything):
While the elevated tariffs didn’t last long, the trauma is real. Businesses now know they need to mitigate tariff uncertainty. [Mitigation involves extra costs and time in addition to the added cost of smaller tariffs elsewhere over what they were paying before the Trump Tariff Wars.]
“The post-WWII trade framework that once underpinned stable expectations is gone; even further tariff rollbacks won’t restore it,” Jianwei Xu, senior economist at Natixis, said in a LinkedIn post Monday.
Xu added that large businesses will continue supply chain diversification, but small businesses may stop production [beause of those added costs and risks]— as overall confidence fades in the U.S. dollar as the world’s ultimate reserve currency….
“It might be just the beginning of the inevitable collision of the two largest economies,” Ting Lu, chief China economist at Nomura, said in a note Monday, adding that “the U.S. is still on the offensive, but China might learn much better on how to dig itself in for the future attack.”
Meanwhile, the vast market that the US has lost in China for its own products may become a permanent loss, at least in part:
“Despite the temporary tariff‑war reprieve, China continues to signal that it is looking to diversify away from U.S. agricultural goods,” Dennis Voznesenski, agricultural economist at CBA, said in a note Tuesday….
He pointed to reports that China, on May 9, signed a letter of intent with exporters in Argentina to buy about $900 million in soybeans, corn and vegetable oil, while China has resumed soybean imports from five Brazilian firms.
It looks like the US will have to restart subsidizing its farmers and do so for a long time if Trump follows his 1.0 bailout plan for farmers that were damaged by his first tariff wars (from which they never fully recovered).
Summer should be interesting.
(Headlines for all the above quotes appear in boldface below:)