Greetings from Copenhagen.

We keep getting false news on the ongoing game of chicken between China and the US, as the trade war has more or less been isolated to a bilateral conflict between the two.

The White House continues to claim that Trump is allegedly talking to Chinese trade officials, but time after time, China denies that he has spoken to any Chinese official since inauguration day. So what’s up and down in this—and who’s lying? Clearly one of them is.

“Sources familiar with the matter” reported earlier today that China was considering exemptions on a select number of US goods. We are now in a situation where both sides are reported to be considering exemptions, yet neither is willing to implement them, each denying they were even entertaining the idea.

China has acted with notable confidence throughout this entire trade war, which supports the argument that it’s in their interest to maintain the appearance of no communication or considerations of exemptions. This stance has been roughly justified by Chinese economic data evolving better than peers lately, with macro surprises ticking higher (while they are falling in the US). However, as we see in our model setup, Chinese growth is starting to roll over, making it just a matter of time before China will have to fold on this narrative.

Trump’s apparent game plan now seems to be locking in trade deals with neighboring countries and Chinese trade partners as quickly as possible to gain the upper hand at the negotiation table. Expect multiple headlines soon of Trump or US officials meeting with Japanese and Indian trade counterparts.

Charts of the Week: Economic Surprises Are Positive in China, But the Picture Is Darkening Beneath the Hood

We have tried to stay on top of the implications of the current US trade policy on macro and markets week in and week out over the past couple of weeks, trying to filter out the noise from rhetorical U-turns and Trump’s flip-flopping, and the more we look at it, the more it looks like the economic shock unfolding in the US economy is of similar magnitude of March 2020, and we will explain exactly why we think this is the case below.

So let’s start off by examining what exactly happened during the 2020 shock (in broader terms) and the main things that characterised the shock, allowing us to compare the pandemic with today:

1. Global Scale
2. Exogenous factor interrupting global markets and supply chains
3. Sharp drop in cyclical price gauges (and inflation expectations)
4. Uncertainty around when the shock will end, causing feed-back loops

So, why is it that we argue that we are seeing the same kind of shock unfolding? Let’s run through the checklist.