The NAB’s head of FX strategy, Ray Attrill, believes a hot American jobs market could embolden US president Donald Trump to push for a better trade deal with China, a scenario that risks derailing negotiations between the two economic superpowers ahead of a planned increase in US tariffs on Chinese imports scheduled to begin on December 15.
“There’s been some concern the US labour market was turning over following weakness in the manufacturing sector seen since July and August. We know the manufacturing sector is pretty much in recession and part of that is due to the ongoing impact of the trade dispute,” Mr Attrill said.
“Were those concerns to be aggravated by the jobs data, it would have put some pressure back on the US.”
However, following the release of another strong US jobs report last Friday that revealed non-farm payrolls had surged by 266,000 in November while unemployment fell to a 50-year low, Mr Attrill said the economy appears well placed to deal with any further escalation in the trade conflict.
“At the margin, Trump can look at his numbers and say the economy is still growing at 2 per cent, the trade dispute isn’t hurting the economy, therefore do I really need to do a deal at this stage?” he noted.
Ahead of the tariff deadline, Mr Trump renewed his attack on Federal Reserve officials last week, suggesting its policies, rather than trade tensions, are hurting US manufacturers.
“Manufacturers are being held back by the strong dollar, which is being propped up by the ridiculous policies of the Federal Reserve – Which has called interest rates and quantitative tightening wrong from the first days of Jay Powell!” Mr Trump said via Twitter.
Mr Attrill said the renewed attack may be more than just Mr Trump attempting to place pressure on Fed officials ahead of the FOMC policy decision due in the early hours of Thursday morning in Australia this week.
“There’s no doubt in our minds that the attacks on the Fed are really designed to create a scapegoat in the event there isn’t a trade deal and the economy isn’t performing as well as it otherwise would do,” he said.
“There is an argument that if he doesn’t want to do a deal, the trade policy uncertainty might bring the Federal Reserve back to the table next year to get interest rates and the US dollar down. He can then do a trade deal and get the best of all worlds.”
Mr Attrill said if tariffs are slapped on about $US160 billion ($234 billion) worth of mostly consumer-related Chinese imports on December 15, it will have a significant market impact should no eleventh-hour phase one agreement be reached.
“Our sense is that it’s more likely than not that it will happen, but is that a view anyone can hold with any degree of confidence? I think the answer is no,” he said. “There’s no sort of mood music that suggests that is likely as soon as this week.”
Last week Mr Trump cast doubt on the prospects for a phase one trade agreement being reached before the December 15 deadline, suggesting he was willing to delay until after the US presidential election in November next year.
“I like the idea of waiting until after the election for the China deal. But they want to make a deal now and we’ll see whether or not the deal is going to be right. It’s got to be right,” Trump said on the sidelines of the NATO summit in London. “It can’t be an even deal. If it’s an even deal, it’s no good.”
Larry Kudlow, director of the White House National Economic Council, repeated those views in an interview with CNBC on Friday.
“The president has said many times if the deal is no good, if the assurances with respect to preventing future thefts, if the enforcement procedure is no good, he has said we will not go for it. We will walk away,” Kudlow said.
Mr Kudlow said that while a deal with China is “close”, he acknowledged the tariff deadline remains important.
“There’s no arbitrary deadlines, but the fact remains December 15 is a very important date with respect to a no-go or go on tariffs.”
On the same day, Donald Trump said on Twitter that markets should “only accept information if it has an actual living name on it” when it comes to trade negotiations.
Mr Attrill said the remarks suggest phase one negotiations may be pushed back into next year.
“Kudlow is still saying both sides are inching towards a deal. If that is a genuine representation of where we’re at, then you would think that if they’re not going to get there by the weekend, they may agree to push the December 15 deadline forward,” he said. “That’s the kind of messy scenario that I wouldn’t be terribly surprised to see.”
Regardless of whether a phase one agreement is reached, Westpac’s head of financial market strategy Robert Rennie isn’t confident there’ll be any further progress.
“Even if they agree to de-escalate and get something down on paper, the idea that we move to a phase two or three, I just can’t see where that comes from given how long it’s taken phase one to materialise,” Mr Rennie said. “The obvious issues Trump faces next year from a political point of view makes me think markets are too optimistic.”
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