The Wall Street Journal reports U.S. Stocks, Bond Yields Fall Amid Trade Tensions.

The latest rhetoric from Chinese officials sent stocks tumbling after Ministry of Commerce spokesperson Gao Fengtold CNBC that the U.S. should “adjust its wrong actions” if it would like to continue negotiations. Investors worry the U.S. and China are moving further apart on trade, potentially exposing U.S. companies and the economy to further retaliation.

Debate Over Baseline Case

Bloomberg reports Full-Blown Trade War Is Quickly Shifting From Risk to ‘Baseline’.

Goldman Sachs Group Inc., Nomura Holdings Inc. and JPMorgan Chase and Co. are among those that have rewritten their forecasts as U.S. President Donald Trump threatens to impose a 25% tariffs on around $300 billion of additional Chinese imports.

Analysts at Nomura have made that hike in duties -- which would mean practically all of China’s exports to the U.S. are hit by tariff hikes -- their baseline forecast. They see it as a 65% probability before year-end, and most likely to come in the third quarter.

Goldman Sachs economists warned that without signs of progress over coming weeks, implementation of the further tariffs could easily become their base case. “While we still think an agreement is more likely than not, it has become a close call,” they wrote.

St Louis Fed Calls on China to Cave In

St. Louis Federal Reserve President James Bullard says ‘Blue Skies Ahead’ for China if it Accepts All US Demands.

St. Louis Federal Reserve President James Bullard expressed optimism that the United States and China will reach a deal to end their trade war, despite recent negotiating setbacks.

My base case continues to be that we’ll get an agreement on trade,” Bullard, a voting member on the central bank’s policymaking Federal Open Market Committee this year, said Wednesday in an address at the Foreign Correspondents’ Club in Hong Kong.

“I think it’s good for both China and the U.S.,” he added.

Bullard also said that China should accept U.S. demands in the trade talks in order to attract more foreign capital, saying the country would stand to reap enormous benefits.

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“They will establish credibility on trade inside China and will reassure foreign investors that they can invest in China and be treated appropriately,” he said in response to questions from the audience.

Bullard's Fantasy

For starters, China will not accept all of Trump's demands.

If anything, Bullard will harden up Trump and the China hawks.

Even if China did accept Trump's demands, why should China believe Trump would not come back and ask for more?

Bottom Line

It's easy to blame both sides here, but the bottom line remains the same:

  • Trump has not closed a single trade deal with his bullying
  • Tariffs are a tax on consumers
  • Trump's trade war case is full of holes

Lose-Lose

Trump can likely inflict more pain on China than vice versa, at least from a GDP standout.

But China has no elections coming up. Trump does. This talk about Trump winning the trade war is nonsense.

For discussion and other views, please see Who Will Win the Trade War? Some Say China, Others Say Trump.

Mike "Mish" Shedlock

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