The June Payrolls release last Friday clearly surprised markets as the notion that the Fed will be forced to cut in late July has faded. The possibility of a rate cut could be put on hold as the previous two months of weak releases have been put in question with the strong June release. More importantly, the US trade talks with China are again in doubt while China seems to be walking away from the table, and US President Donald Trump does not have a deal. For now, the US and China will move into a new phase of trade talks and will start to play a prolonged waiting game. Clearly the US and Chinese economies are starting to slow with the second half of 2019 seeing US economic expansion at 1.5% to 1.8% according to some analysts.
Our views: China is in a unique situation in which it does not want to give the US a “win” on trade as any win now would clearly give the US President Donald Trump an advantage in the 2020 election. If Trump is elected, China has a deepening trade war to battle but if he is disrupted and knocked out of office, not having a second term, China will likely have a more relaxed Democrat in office who will be less antagonistic to China with regards to trade and military challenges in the South China Sea. This trade war will continue for another 6 months or more, and it could end in Trump giving up and allowing China a short-term win. If this helps him get re-elected, he just might capitulate by January.