We entered the Fed meeting today expecting no surprises.  I would point out two statements that surprised me:

After three rate cuts in five months, and over $300 billion of asset purchases, Powell described monetary policy at this point as only “somewhat” accommodative.

Statement #2:  Remember Powell’s statement this summer that rate cuts were simply a “mid-cycle adjustment” (i.e. a reset in a longer term hiking cycle)?  It made Powell sound like he was in denial about the Fed’s mistakes of the prior year.  The markets didn’t like it.  Today, he walked that back by saying, “need for rate increases is less than it was in the mid 1990s cut cycle.”

Bottom line:  We were expecting a “we’re on hold, nothing else to talk about” tone from the Fed.  But we got a more dovish Fed communication.

You could argue that this all indicates that the Fed has no confidence that the global trade wars will be resolved.  I would argue that they now (finally) understand, given the persistently subdued inflation data, that the downside risks of being overly easy are less (maybe far less) than being overly tight.  The latter, the markets should like.

Yesterday we talked about the weak November U.S. manufacturing data, and recalled back to early October, when a big negative surprise in the manufacturing data kicked off a few sharp down days in stocks. 

Two days in, and the month of December continues to repeat the narratives surrounding stocks in early October.  Similar to the start of Octoer, we’ve had a weak manufacturing number.  Similar to the start of October, Trump has been hammering away at the Fed again, pushing for another cut (this time at the December 11 meeting).  And similar to October, Trump has ramped up aggression on the trade front.

It was early October when the headline hit that the World Trade Organization has sided against a longstanding United States complaint against the EU over subsidies that have been given to the European aircraft maker, AirBus — anti-competitive to American aircraft maker, Boeing.  This decision awarded the U.S. the right to sanction the $7.5 billion of EU imports related to the case.

Yesterday, not only did Trump put Brazil and Argentina into the tariff fray, but the U.S. threatened to step up the tariffs on the EU.

What about China?  Back in October, as Chinese officials were due to meet in Washington for a promising round of trade talks, Trump went on the offensive. The Trump team blacklisted eight Chinese tech firms and restricted the visas on some Chinese officials, all of which they associated with human rights abuses on Muslim minorities in China.  This looked like a major spoiler heading into the high level trade talks.

Why did he ramp up the tensions back in October?  Leverage.

Trump always had leverage over the Chinese on these negotiations, and has been in complete control (able to make concessions and pull the trigger on a deal at any time).   But that leverage eroded as economic data began to erode and as the timeline narrowed toward next year’s election.   But Trump found an angle to regain leverage. By taking aim at the human rights abuses of the CCP, he telegraphed to the Chinese how he might bring the rest of the world over to his side, to join the fight.  Did it work?  Just days later, the Chinese Vice Premier was shaking hands with Trump in the Oval Office on a deal.

Fast forward to this week, and Trump, again, has ramped up the offensive on China, though a “Phase one” deal is supposed to be all but “papered.”  Why?  Perhaps its more leverage to get final details of a “Phase one” deal to swing his way.

From a risk perspective (of a bluff being called):  Remember, the central banks are already positioned for a worst case scenario — an indefinite trade war.