For Markets, It's Trump’s Plan A or Bust

U.S. stocks ended little changed on Wednesday, keeping the S&P 500 Index on track to gain more than 6% this month. That’s a rare feat; it has happened in just four other months since 2011. The bulk of the rally is tied to the Federal Reserve’s dovish pivot, but it is also due in part to optimism that trade talks between the U.S. and China will prove fruitful enough at the Group of 20 summit in Japan that President Donald Trump will delay imposing additional tariffs on Chinese goods. That’s plan A. It’s plan B that markets should worry about.

Trump has said he may decide to raise tariffs on the remaining $300 billion of Chinese imports if he doesn’t like what he hears from China President Xi Jinping at this weekend’s summit in Osaka. On Thursday, he doubled down, telling Fox Business Network that “my plan B with China is to take in billions and billions of dollars a month and we’ll do less and less business with them.” Just a hollow threat? Maybe not. This month’s rally in equities seems to have emboldened Trump, who on Thursday sent a tweet thanking himself after the S&P 500 reached another record. And about that economic slowdown? Commerce Department data on Wednesday showed that orders with U.S. factories for business equipment rebounded in May with the largest increase in four months, signaling corporate investment is holding up despite tensions with key trading partners fueling uncertainty about the outlook. Based on this report alone, the economists at RBC Capital Markets said they boosted their second-quarter gross domestic product forecast to a 2.8% annualized rate from 2.5%. There’s even a chance that growth gets to 3%, the RBC economists noted, adding that such a number was “something that many found downright laughable a few weeks ago.”