The US Federal Reserve and other monetary giants are used to having their way with traders. They drop hints of what markets should do and punters react dutifully.
Now the traders are running the asylum and, arguably, ruining it. Not financiers, mind you, but rather huge nations running roughshod over global commerce. Yes, Donald Trump, we’re talking to you.
The US leader’s escalating trade war is boomeranging back on Fed Chairman Jerome Powell. The minutes of the Fed’s latest policy meeting raised “concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity.”
Powell’s team also found indications that “plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.” What’s more, US policymakers highlighted worries across industries “about the effect of potentially higher tariffs on their exports.”
Extraordinary and illuminating stuff. At the very least, Trump’s assault on trade will limit Fed rate hikes in the months ahead. Might a similar recalculation preoccupy Asia in the second half of 2018? Absolutely.
Tokyo is awash in breathless speculation about stealth tightening by the Bank of Japan (BOJ). Well, “tapering” at least. By the end of June, the media unearthed at last three examples in a 30-day period where the BOJ cut bond purchases.
That’s now an extraordinarily difficult balancing act for BOJ Governor Haruhiko Kuroda to pull off. Gross domestic product (GDP) growth cratered between January and March, Japan’s first contraction in nine quarters.
Making that 0.6% drop all the more credible was a sizable downward revision to fourth quarter output. That effectively made the October to March period a wash from a growth perspective.
The BOJ’s latest “tankan” survey of confidence among big manufacturers left little doubt Trump is slamming the world’s third-biggest economy.
The deterioration in confidence over the last three months –- down to 21 from 24 in March -– has grave implications not just for capital investment but wages. This, after all, was supposed to be the year in which Japan Inc finally gave the long-suffering salaryman a raise.
That virtuous cycle is running into a Trump White House willing to hurt its biggest allies -– Japanese Prime Minister Shinzo Abe, included –- to cheer his voting base. Trump’s efforts to destabilize China also has Japan Inc reeling and the BOJ at a crossroads.
Bank of Korea (BOK) Governor Lee Ju-yeol is having his own troubles navigating Trump’s trade war. In November, Lee lifted the spirits of Asian peers when he became the region’s first major central banker to tighten since 2011. Since then, the external sector has turned on Korea Inc with a ferocity few saw coming.
At the very least, the addition BOK rate hikes traders had been pricing in are off the table. As the Korea Times reports, think tanks are racing to downgrade growth forecasts. Initially pegged at 3% for 2018, expectations are changing fast for consumption and employment prospects.
China’s newish central banker, Yi Gang, is also left with stabilizing a giant, imbalanced economy Trump is determined to shake. Like some hedge fund genius, Yi’s People’s Bank of China (PBOC) predecessor Zhou Xiaochuan retired at the very top tick of the mainland’s economic rise.
Yi now faces an unenviable choice: add more liquidity to a bubble-plagued economy or let market forces guide Chinese asset prices? The odds overwhelmingly favor the first option. Yet the plot thickens when you consider the yuan’s growing weakness, down more than 2% versus the dollar this year.
Its drop, one can argue, is a rational response to Trump’s trade shenanigans and plunging Shanghai stocks. Yet concerns about defaults on dollar-denominated debt are sure to limit how low the PBOC lets the yuan go.
Other Asian policymakers have been plenty busy of late. Bank Indonesia, for example, has raised its benchmark rate by 100 basis points in two months. Trump’s trade war has current account deficit-running nations like Indonesia on the run.
That includes India, where the central bank boosted short-term rates in June for the first time in more than four years.
Yet no Asian central banker will come out of Trump’s trade war unscathed. With nimble, creative and forward-looking moves, monetary authorities can indeed regain some control over markets.
In the short run, all traders who thought they knew about interest rates for the rest of 2018 is getting trumped as we speak.