Submitted by Michael Every of RaboBank,

What a difference a day makes. Twenty-four little hours. Yesterday we were kicking our heels. Now anyone who was still clinging to the belief that we are in market business as usual should be kicking themselves instead.

First, US December retail sales collapsed the most since 2009at -1.2% m/m (expected 0.1%) and -1.7% for the control group (expected 0.4%). Of course, this head-long fall took place at the same time as a polar vortex was freezing the country, and as the government shut-down was in place, including the people who were supposed to be collating these data. Near-term reaction is that fears over a synchronised global slowdown/recession have shot up; but it would seem very likely that these numbers are going to be very heavily revised at some point and look far less scary. Larry Kudlow called it a “glitch”. For once he might be right.

[ZH: no "glitch" comment today from Kudlow as Industrial Production plunged? We guess a 500 point ramp in the Dow off overnight lows will fix that]

Then we got news that will have shocked (shocked, I say!) all those expecting good news from the US-China trade talks. We heard that if the can were to be kicked, and it’s still an ‘if’, then the term would be extended for 60 days, not 90. So deflation even in that figure. But then we had reports that, surprise surprise, the US and China remain “far apart” on reform demands. Yes, it seems that USTR Lighthizer, who understands China Inc. like the back of his hand, is insisting on Beijing stopping subsidies for SOEs and genuinely opening up the economy. That is simply not going to happen, as we keep saying. It’s literally like asking the US to embrace socialism tomorrow. And, yes, in both countries there are constituencies who would prefer more markets and more socialism, respectively, but in neither case are they near the levers of power.

One of those constituencies, one could quip, is New York, which has successfully cancelled Christmas for all those who were banking onAmazon building its HQ2 in Long Island: that plan is now offafter a local political backlash. At the same time one can also quip that mind-bogglingly wealthy Amazon will now have to find someone else to fund its market socialism, and New York can spend the USD3bn “incentive” on things like preventing the subway falling apart.

But back to China. The news we heard about pushing for real reforms, which everyone involved as made clear since the start, does not suggest the White House is going to simply blink and sign (it genuinely pains me to type this yet again) a more-soy-and-gas-and-US-agri deal.

Neither does the Bloomberg headline today that 6 out 10 surveyed CEOs see US tariffs on China as helping them. “But that’s not how tariffs work!” I can hear some spluttering. Well, yes it can be; it just isn’t how textbooks written by economists who have never run a business --hey, I’m one too but at least I recognise that fact-- teach it. If you shut out heavily-subsidised foreign competition how can that hurt you, unless you rely solely on their inputs…in which case, as the Bloomberg survey shows, supply chains will shift – and they are shifting. So there are obviously losers….and more winners, perhaps, if those CEOs know their own businesses better than economists do. Of course, the other hypothetical argument is that shutting out foreign competition reduces US productivity because it allows local monopolies to develop; but will the average US widget maker rapidly grow to the point where it can demand USD3bn from New York City to move its HQ there?

Also not suggesting a trade deal looms is that Trump is allegedly days away from banning all Chinese telco products in the US completely via executive order. On which note, Beijing is said to want to deal with the Huawei CFO as a side issue: but isn’t this a matter for the courts?

Further saying the same thing on US-China trade is that on Sunday Trump will have a report on his desk arguing in favour of 25% tariffs on EU auto and auto-part imports in the name of “national security”. Can that really be claimed as national security? It depends how you define it. If you mean “retaining all the highest-paid/value-added jobs” in a mercantilist sense, then it’s a no-brainer the answer is yes. Which is also why Europe, where GDP grew a mighty 0.2% q/q in Q4, wants to keep them. I wonder if one can draw a line from that national security issue to Vice-President Pence in Warsaw demanding the EU line up behind US sanctions on Iran?

Finally, but by no means least, we are not going to get a US government shutdown tomorrow. Trump is going to sign a stop-gap spending bill; but he is also going to declare a national emergency and build the wall anyway. And on that front markets need to wonder both what a constitutional crisis in the US looks like, and if that looks like a man who is going to fold on China. These are murky constitutional waters Trump is sailing the US into. Wall aside, once a precedent is established here I am sure “emergencies” will be popping up more frequently, just as previous presidents leaned on executive orders that were not originally envisioned by the constitution. There’s also no guarantee Congress will allow the move to stand. But if it does, Trump is emboldened; and if it doesn’t, he needs to look tough somewhere else with bipartisan support. And that’s China, folks.

Over in the UK things are also sailing into uncharted waters and looking tough, but with no bipartisan support. The government suffered another humiliating Parliamentary defeat last night, and although the vote itself was not really important, the political symbolism was. The EU can see that the Tory party is hopelessly split, and that the only way to get a Brexit deal through Parliament is cross-bench; and that isn’t going to happen. This matters hugely because the existing Withdrawal Agreement needs to be amended to have any hope of passing – and yet from the EU perspective they now have even less incentive to blink and do so given that PM May looks too weak to use the lifeline if it were even offered. GBP didn’t react much to the vote, but arguably should have.