Key insights from the week that was.
Global trade has been on the market’s mind this week as the US/China trade deal was signed and the U.S.M.C.A legislation passed the US Senate – the latter removing trade risks between the US, Canada and Mexico.
On Wednesday, the US and China finalised their stage 1 trade agreement, signing the deal and releasing its full terms. In line with the announcement made before Christmas, the US will refrain from increasing tariffs further and will also halve the 15% rate introduced on circa $120bn of imports in September 2019 to 7.5%. However, the 25% tariff on $250bn of imports will remain in place indefinitely.
In return, China has pledged to increase imports from the US by $200bn over the next two years (benchmarked against 2017 import levels) across manufacturing, energy, agriculture and services. China has also agreed to provide US firms with greater access to some sectors of its economy and to increase protection around intellectual property. Existing tariffs on US goods will however remain in place.
A full resolution to this conflict is reportedly not an option until after the next US Presidential election in November 2020 and will also depend on China’s willingness to make further changes to economic policy and regulation. Moreover, the reduction in tariffs under stage 1 is conditional on China achieving the $200bn increase in imports from the US over 2020 and 2021, which will prove very challenging. As a result, the remaining tariffs will likely remain in place through to at least the end of 2021 and, during this time, a further escalation of tensions will remain a risk.
From the data to hand, most notably the PMI detail (the ISM manufacturing index at 47.2; China’s NBS manufacturing PMI at 50.2), it seems that China is adapting to the persistent pressure on trade and growth whereas the US is struggling. As we continue to emphasise, the prime risk for the US’ economy is if the weakness apparent in manufacturing and business investment across the economy spreads to employment and hence consumption. This dynamic would see the FOMC ease further in 2020, as growth falls below trend and PCE inflation remains at or below their 2.0%yr target.
Employment and wages were certainly growing at a more modest pace at the end of 2019 than when it began, and the most-recent retail sales outcomes point to this deceleration now affecting consumption.
Specifically, although the December retail sales outcome met the market’s expectation, this followed a disappointing November outcome. Moreover, sales growth in both months (on a headline and underlying control-group basis) is best regarded as modest not strong, averaging 0.3% and 0.2% per month respectively. Ahead, we expect business investment to remain weak, employment growth to soften further and consequently the recent subdued pace of household spending to persist through 2020. To our mind, this will justify further FOMC rate cuts in 2020.
Coming back to Australia, housing finance posted another robust gain in November, 1.8%, to be up 5.9%yr. Investor credit grew more strongly in the month than owner-occupier loans, respectively 2.2% and 1.6%. However, owner-occupier credit remains the primary driver of the recovery that began in May 2019, gaining 20.5% versus 10.9% for investors. For the latter, note also that this gain follows a sharp correction from early-2017.
Ahead, Q4 China GDP is still to be released today. Next week, the focus will turn in Australia to consumer sentiment and the labour market. In the US, the Senate Impeachment trial of President Trump is due to get underway.