Between "constructive" trade talks, a "beautiful letter" received from President Xi, to the expectation that the meeting at the G-20 meeting in June will be "very fruitful," and the acknowledgment from Orangeface that he has great respect for, and a great relationship, with President Xi, the one thing still missing at the end of it all is a trade deal.

For the first time in the 18 month or so “trade war” there is this growing belief and concern that the unlikelihood of a deal taking place is more likely today than it was originally. China redacting already “agreed upon” terms gives the notion that the Chinese could, and probably will, dig their heels in more than originally anticipated and that the “trade deal” is not close at all. Despite the rhetoric from the Trump administration that the deal was pretty much “done”, for the first time during this entire “negotiating” process, investors, and traders alike, don’t believe the bullshit.

That missing deal helped created a catalyst for the market’s recent broad-based sell-off, because a series of headlines coming out of the U.S. and China sounded more disgruntled than amicable with respect to getting a trade deal done anytime soon.

The recent tug-of-war in the market has been primarily “headline” driven. I use the term “headline” in quotations because the headlines have been anything but real. The pops in the last few weeks have come on the heels of Trump and his cronies kicking the can down the road. “Headlines” that read “Trump hasn’t decided yet about whether or not to impose a 25% tariff on additional $300B of imported Chinese goods.” These “headlines” force the sellers to rethink their selling and force the buyers to take a shot. It creates sloppy action in the markets and makes for a “headline driven” market until either a catalyst takes place to reinvigorate the buyers or burn them. If a catalyst does not come, exhaustion takes hold and the action in the market will be determined by technicals.

Basically, market participants know nothing more of substance today than they did yesterday. On days that there is a nicer tone, the futures market will tend to have a nicer disposition. The opposite is true of course.

The thing to watch for in this market after a positive headline gap up is how the action trades off that gap. It yields a further blow to sentiment if the market fades quickly after the opening gains and then can't find a concerted rebound stride. The 2800 area for the S&P 500 is a key area to watch. If it falls today, the 200-day moving average (around 2770) will come into focus as the next potential test for the down leg that began on May 3. Similarly, the Nasdaq 100 has the 200D support below at the 7150 level.

In the meantime, Orangeface is hoping the Fed will lower interest rates.  He speculated in a tweet that China will probably reduce interest rates to make up for business it will lose due to the tariffs before adding that, "If the Federal Reserve ever did a 'match,' it would be game over, we win!"

The Import/Export Price Index for April certainly didn't present a strong case for the Fed to raise interest rates.

Import prices increased 0.2% month-over-month and declined 0.1% excluding fuel.  Export prices rose 0.2% and were up 0.4% excluding agricultural exports.

On a yr/yr basis, overall import prices declined 0.2%.  Excluding fuel, they were down 0.9%.  Export prices were up just 0.3%, versus 3.7% for the 12-months ending in April 2018, and up only 0.7% excluding agricultural products, versus 3.9% for the 12 months ending in April 2018.

The key takeaway is that import prices declined, creating another data point that shows a lack of worrisome inflation pressure.

The Fed’s primary fear when it comes to rate cuts has been the fear that inflation “could” get out of hand. For whatever reason, inflation has not creeped up yet (at least not by their measurements). This lack of inflation “should” give them rationale not to raise rates should they decide to go down that path.

The Fed certainly creates another “moving” part to watch in all of this. The issue, in my opinion, is that the Fed wild card is very Trumpian. What I mean by that is that the Fed reducing rates would only come on the back of threats made by the Orange late last year. This is dangerous because it gives the “perception” that the Fed is moving in reaction to the Orange’s whims. It is doubly dangerous because it begins to give the notion that the Fed’s moved are being used as “slack” or “ammo” for the trade war itself. The primary function of the Fed is not to give room for further restrictive trade action but rather to take action to keep economic activity flowing. Should they capitulate and start taking action otherwise it would definitely create a major worry for potentially necessary action down the line.

In simple terms, if the Fed is taking measures to cut interest rates at a time when they don’t need to cut interest rates. The Fed would corner themselves at a later date in the future as that would create one less rate cut that they have the ability to do. The double danger is that Trump believes (wrongfully) that the tariffs are paid by China and that they are not just passed on to the consumers. A rate cut likely emboldens him to take further tariff actions which would only create further “pass it down to the consumer” action. Should that be the case, all this “non-existent” inflation that we keep hearing about will pop up faster than the Fed’s ready for.

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