Quick Thoughts on the Road to Osaka
ASIA MACRO, US MACRO, ASIA STOCKS: Trump and Xi meet Saturday morning at the G20 in Osaka, arriving in maximum threat-postures but having offered hints of compromises and off-ramps. Xi is weakened by having backed down in Hong Kong, but grateful to Trump for having stayed silent – a token that Trump will help Xi save face when he does a trade deal. Xi has provided a roadmap to face-saving compromises that preserve China’s “dignity.” Trump comes flush with the victory of having used tariffs to effectively get Mexico to “pay for the wall,” and the support of a more dovish Fed. He is loaded with new tariffs in the pipeline, but delaying them was reportedly a precondition of the meeting. Chinese stocks are still the best-performing in the world in 2019, signaling a deal will get done. But their decline from the April highs shows that China’s economy is at risk with no deal. The Chinese Communist Party faces difficult trade-offs here, but public choice reasoning suggests is better off with a deal than without one.