Thoughts for the month ahead: Yipes! President Trump shocked the markets on May 10^th by doubling down on tariffs against all Chinese imports. Last Friday, he again shocked everyone by threatening 5% tariffs, starting June 10^th, on all imports from Mexico if it doesn’t stem the tide of immigrants. That dashed any hope markets might have had for a phase down of mutually assured destruction. I haven’t given up hope that some way out could be found when Trump and Xi meet at the G-20 meeting in Osaka, Japan on June 28^th-29^th. The markets are anxiously awaiting the 8:30a.m. June 27^th first preliminary Q2 U.S. Real GDP estimate, telling us how much growth has slowed down from the unexpectedly hot 3.1% Q1 figure. Private forecasters are bunched around 2%, but the Atlanta Fed is estimating 1.2%, low enough to revive recession fears.

China Trade Agreement: Talks are at a standstill as tariff retaliation escalates. China stopped all purchases of U.S. soybeans last week, and it is readying a range of other weapons, e.g. withholding rare earths, investigating FedEx, etc. Then yesterday, China’s Vice Commerce Secretary Wang Shouwen told reporters, “We’re willing to adopt a cooperative approach to find a solution.” That’s a start, but U.S. demands that China change its laws on intellectual property protection, stop subsidizing its export industries, and reduce its trade deficit seem unlikely to be met.

USMCA: Many hoped that the U.S.-Mexico-Canada Agreement might be on a path to ratification by now, but those hopes were dashed last Friday when President Trump decided, over the advice of several advisers, that he would impose 5% tariffs, starting on June 10^th, on all imports from Mexico if it failed to staunch the flood of immigrants. Several Republican senators immediately decried the move, without any discernible effect; all of the Democrats condemned the threat. 

Q2 GDP and Monetary Policy:  Even though inflation has crept up to the Fed’s 2% target, as measured by the Dallas Fed, the trade war, weakening consumer demand, slowing investment and a very tight labor market, resulted in the Fed postponing another quarter point rate hike until late this year – if then. No change is expected from the next Federal Open Market Committee meeting, June 18-19. As usual, the markets will parse every nuance of Chair Powell’s 2:30pm EDT June 19^th press conference. The markets will also pounce on the June 27^th Q2 Real GDP estimate. If it drops to 1% or lower, markets will react. The Atlanta Fed’s GDPNow shows private forecasts ranging from 1.5% to 2.5%, but its own forecast is for 1.2%.  

Disaster Relief, Government Funding, and the debt limit:  Up until now, disaster relief bills passed easily – not this year. White House insistence on funding for The Wall, and opposition to more aid for Puerto Rico, left talks at a standstill until the last minute on May 23^rd before the 10-day Memorial Day Recess. The next day, the Senate voted 85-8 in favor of the $19.2 b. H.R.2157, but the House had already left town. So, last week, Democratic leaders made attempts during each of three pro-forma sessions to get unanimous consent to pass the bill, but conservative Republicans objected each time, objecting to its cost and to the lack of funding for The Wall. The bill will pass the House on June 3^rd and the President has signaled he will sign it. So disaster victims waited 10 days longer for aid to score some political points – Washington dysfunction is pervasive. It’s very unlikely that more than a few appropriations bills will be signed by midnight, September 30^th, so Congress will pass one last minute that continues its resolution to fund the government. Unlike last December and January, when President Trump shut down over half of the government for 35 days without getting any concessions from Democrats, he is expected to sign the continuing resolution and avoid a shutdown this time. Similarly, he is very likely to sign a debt limit increase or suspension in September, if not soon after. The latest estimates are that the Treasury has enough cash to avoid default until early November.

2020 Election: So far, President Trump’s only primary election opponent is former Massachusetts Governor William Weld. Assuming Mr. Trump runs, and he is actively working for that, he will romp to the nomination.  Meanwhile, at last count, 24 Democrats are running for president. Joe Biden finally entered the race and is outpacing Bernie Sanders by 20 points in the latest polls. Biden’s “man of the people” approach is well liked, but Democratic voters worry that he’s too decent and too old to win against Trump. There’s a long way to go, so it’s way too early to place a bet. The first Democratic debate will be held on NBC over two nights, June 26^th and 27^th.  So far, 19 candidates have qualified.  The early odds are that the Republicans can retain their Senate majority and that the Democrats will still control the House. With some two-year exceptions at the beginning of recent presidencies, America has had a divided government – and it’s very likely that that will continue after 2020.