Are Trump and Xi desperate enough to kiss and make up yet?

Chinese growth is struggling. US markets look vulnerable. But are the two leaders desperate enough to put a positive spin on the next round of trade talks? John Stepek investigates.

Donald Trump and Xi Jinping © Kyodo News Stills via Getty Images

After a tough week last week, markets got a bit of respite on Friday afternoon.

US jobs and wages data contained enough slivers of hope to keep markets hoping that recession can be avoided or put off.

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The big question this week is: are China and the US desperate enough yet to strive for a positive spin on their next batch of trade talks?

The US economic outlook is not quite as bad as some had feared

The US jobs data had something for everyone.

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After a week-long dirge of bad economic data, anything other than a completely catastrophic reading was going to be welcome to markets. And in the end, this one was a lot better than completely catastrophic.

On the one hand, payrolls grew by less than expected 136,000 staff were added in September, compared to expectations for around 145,000. And wage growth slowed right down to an annual rate of 2.9%, from 3.2% before.

However, the unemployment rate hit its lowest level in 50 years, dropping to 3.5%. And the previous month's payroll figure was revised substantially higher.

The weakness on wage growth means the Federal Reserve, America's central bank, doesn't really have any reason not to cut interest rates again later this month. At the same time, the collapse in the unemployment rate and the mediocre-but-not-awful pace of payroll growth suggests that the economy isn't yet as bad as some had feared.

But it does rather leave markets in limbo. At the end of the day, unemployment only tells you that things have been going OK in the recent past. It doesn't tell you whether or not things are going to be OK tomorrow.

Businesses don't lay staff off when things are going well. They do it once they've been struggling for a bit. This is why unemployment is a lagging indicator. It only starts going up once the economy has already been deteriorating for a while.

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So where might markets take their next cue from?

Are Trump and Xi desperate enough to kiss and make up yet?

I think that what's worth watching is how this might all affect the tone of the latest batch of talks between China and the US. As it stands, high-level talks are set to resume in the US on Thursday and Friday this week.

Obviously, we can't be sure they'll even take place, given past performance. We could get a tweet at any minute calling the whole thing off. But neither Donald Trump nor his Chinese counterpart Xi Jinping have had a great few months during the stand-off phase of the trade wars.

Chinese growth is struggling and has been for some time. It's not all down to the US and trade wars by any means. But with Hong Kong in turmoil, not to mention devastating swine fever ravaging the pig population (thus driving up prices of pork, the staple meat), this is just another headache China could do without. Getting somewhere on trade even if it's mostly talk would be helpful.

Meanwhile, Trump has made a virtue of the rising stockmarket during his time in office. What he decried as nothing more than a money-printing-inspired bubble under Barack Obama, has become a testament to Trump's own competence since he took over.

Of course, the rising market had very little to do with either president. But it's never a good idea to tie your brand to such a fickle measure, because stocks do occasionally go down as well as up, and the US market in particular looks vulnerable at the moment.

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That's not what Trump needs with the next US presidential election in just over a year. And he has been unable to get Fed boss Jerome Powell to act with quite as much urgency as he'd like on monetary policy (he must be kicking himself for getting rid of Janet Yellen).

This is without even going into all the impeachment stuff. Arguably Trump could do with a triumph right now or within the next few months at least. So the idea that the bull run in equities is now under threat might encourage him to do more than just talk up the prospect of a deal with China.

This is, of course, just speculation. You can try to apply "game theory" to this stuff as much as you want, but there are many more incentives and egos and loopholes to this than anyone outside that room can really understand. Not to mention the fact that mistakes get made even when a given outcome might seem to have mutually beneficial consequences.

Again, though, this isn't something you have to second-guess when it comes to your portfolio. I'm just trying to keep you informed about what might occur this week.

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