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“We had expected a final round of tariffs targeting remaining Chinese imports at a 10 percent rate,” the analysts, led by chief U.S. economist Jan Hatzius, wrote in a note to clients. “But news since President Trump’s tariff announcement last Thursday indicates that U.S. and Chinese policymakers are taking a harder line, and we no longer expect a trade deal before the 2020 election.”
Goldman’s reversal comes in the midst of escalating tensions between the world’s two largest economies, including the U.S. labeling China as a currency manipulator, and Beijing suspending purchases of American agricultural products — a huge blow to farmers.
Analysts also said they don’t believe the 10 percent tariff on $300 billion worth of Chinese goods, which Trump announced last week, ending a ceasefire that began in May, will go away anytime soon. The U.S. is set to impose the import tax on Beijing beginning Sept. 1; Washington already imposes a 25 percent tariff on $250 billion worth of Chinese goods.
“While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 re-election prospects, we are now less conﬁdent that this is his view,” the analysts wrote.
Goldman also upped the chances for a third rate cut during the Federal Reserve’s meeting at the end of October. Currently, traders are pricing in a 100 percent chance of a reduction in the benchmark federal funds rate at the U.S. central bank’s September meeting, with most forecasting a 25 basis point cut.
“The Fed has been increasingly responsive this year to trade war threats, bond market expectations, and global growth concerns,” the Goldman analysts wrote. “In light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit, we now expect a third 25bp rate cut in October, for a total of 75bp of cuts."