Heading into this weekend's historic Trump-Xi dinner date, Goldman was skeptical, stating that it was "too soon for a deal" and while it said the odds of a truce were just under 40%, it gave better than even odds of further escalation stating that "it is slightly more likely that the talks end with an optimistic tone but that there is no immediate commitment to delay the step-up in the tariff rate to 25%." Goldman did hedge, however, saying that "we view this as a reasonably close call."

And with one look at futures this morning following a summit conclusion that kicked the can on new tariffs and rate hikes by 90 days, it's a good thing it did (unlike JPM which correctly predicted truce odds were 70%, forecasting that the market's most likely reaction would be to send the S&P to 2,800 which is precisely where the ES is stuck now).

So what does Goldman think happens next? Perhaps not surprisingly, while the central banker incubating hedge fund tacitly admits its gloomy forecast was misplaced and praises the near-term can-kicking, the bank retains its overall pessimism and in its post-mortem writes that "this outcome is closest to the “pause” scenario we outlined in recent comments although the length of the pause is fairly short" and notes that while "the result shows the willingness of the two sides to reach a deal" Goldman still thinks that "finding a mutually agreeable compromise that leads to a comprehensive rollback of tariffs will be challenging."

As part of its hot take, Goldman lists the tentative agreements that were reached on a "few less controversial issues" including:

Chinese purchases of US products. The US press release stated “China is to purchase a very substantial amount of agricultural, industrial and energy products” from the US. The White House appears to expect purchases of agricultural products to start immediately. No quantity or specific commodities were mentioned, but purchases are likely to involve more meat, especially pork, products, given there has been an ongoing swine flu outbreak in China which led to the slaughtering of large amount of pigs and higher demand for alternative protein sources. Soybean purchases also seem likely, as they have been among the most politically important aspects of China’s retaliatory tariffs on US exports. This could also signal a partial unwinding of China’s retaliatory tariffs, which targeted agricultural products in earlier rounds.

The US press release stated “China is to purchase a very substantial amount of agricultural, industrial and energy products” from the US. The White House appears to expect purchases of agricultural products to start immediately. No quantity or specific commodities were mentioned, but purchases are likely to involve more meat, especially pork, products, given there has been an ongoing swine flu outbreak in China which led to the slaughtering of large amount of pigs and higher demand for alternative protein sources. Soybean purchases also seem likely, as they have been among the most politically important aspects of China’s retaliatory tariffs on US exports. This could also signal a partial unwinding of China’s retaliatory tariffs, which targeted agricultural products in earlier rounds. China will make fentanyl a controlled substance . China’s drug control is concentrated in traditional substances and awareness of use of such substances as drugs among the general public and officials is low. Traders have been arbitraging this regulatory gap and exporting this substance to the US. This is not viewed as a big issue in China and given the US focus it is easy to understand that President Xi agreed make this move.

. China’s drug control is concentrated in traditional substances and awareness of use of such substances as drugs among the general public and officials is low. Traders have been arbitraging this regulatory gap and exporting this substance to the US. This is not viewed as a big issue in China and given the US focus it is easy to understand that President Xi agreed make this move. The US press release quoted President Xi as saying that, should the Qualcomm NXP merger request be presented to him, he is open to approving it. Official Chinese media reports did not mention this issue.

he is open to approving it. Official Chinese media reports did not mention this issue. Reporting from Xinhua suggests that the US agreed to continue to welcome Chinese students in the US. This comes following recent reporting in the US media that the White House could soon announce new restrictions. The US statement does not mention this. Xinhua also states that the US has pledged to continue to respect the “One China” policy regarding Taiwan as part of this understanding, though the US statement does not mention this.

That said, Goldman echoes our own take from Sunday, specifying that there appears to have been no concrete progress on the other important issues of market access, IPR protection, cyber attacks, and forced technology transfer (the latter two US concerns have always been denied by Chinese policymakers) which are left for working level officials to work out in the next 90 days.

So, as Goldman's political analyst Alec Phillips summarizes, "the actual amount of concrete progress made at this meeting appears to have been quite limited, as expected."

Furthermore, Goldman also notes that "while the Xi-Trump dinner has clearly improved the tone of the US-China relationship for the time being, and we would expect an initial positive market reaction" - correctly, with the S&P set for another torrid surge this morning - the “pause” prolongs the period of uncertainty around the eventual structure of trade relations between the two countries. Specifically, Goldman warns that "the specter of higher and broader US tariffs remains, and the underlying issues clouding the trade relationship are deferred to further negotiations. With additional time to pursue negotiations, we think the chance of a comprehensive deal that involves rollback of tariffs is slightly higher than before, but still not our base case—perhaps a 20% probability over the next three months." And, notably, Goldman points out that while the Chinese statement referred to both sides agreeing to “work toward scrapping all tariffs”; the US did not.

So with a comprehensive deal unlikely to be announced some time in late March, Goldman believes that "the two most likely outcomes in our view continue to be a continuation of the “pause” that was just announced— i.e. a partial agreement that forestalls further escalation but does not eliminate existing tariffs—or incremental escalation, involving the eventual step-up to the 25% tariff rate on $200bn of imports already subject to 10%."

While it is a close call which of these is more likely, at the margin it seems slightly more likely (just over 50% probability) that the talks will falter when they reach more difficult issues and that the step-up to 25% will still occur in March or beyond.

Even so, the bank concedes that its initial skepticism may have been overdone, and adds that between the possibility of a continued “pause” and the possibility that an agreement is reached after the step-up to 25% occurs (if it occurs), the probability of tariffs on imports from China beyond the $250bn already affected has decreased in our view.

One final point: the outcome of the 90-day negotiations will likely be affected by how the markets and domestic political sentiment react, as the response "may influence the willingness of both sides, particularly President Trump, to reach a deal in the future."

On the other hand, Goldman hedges one more time, cautioning that "to the extent either country sees the other as particularly keen to make a deal, its policymakers may try to drive a harder bargain, making an eventual compromise more difficult."

The bank concludes that regardless of the near-term outcome, "the US-China announcements send a constructive signal regarding the eventual outcome of these talks, and strengthen our view that President Trump is likely to want to conclude an agreement—even if it does not include a full rollback of tariffs—well ahead of the 2020 presidential election."