- USTR Lighthizer says there are still hard issues for a US/China trade deal
- U.S. Q4 GDP expected to ease to +2.3%
- Brexit hardliners start to thaw on May’s Brexit plan
- China Caixin manufacturing PMI expected to stabilize
USTR Lighthizer says there are still hard issues for a US/China trade deal — U.S. Trade Representative Lighthizer, testifying on Wednesday before the House Ways and Means Committee, pushed back on market hopes that a US/Chinese trade deal is nearly done. Mr. Lighthizer, as the lead U.S negotiator in charge of the US/Chinese trade talks, certainly has an interest in keeping expectations low so that he isn’t drawn into U.S. concessions simply to get a deal done on time. Still, Mr. Lighthizer’s comments reminded the markets that the U.S. and China still have some serious issues such as enforceability to work through before there can be a final agreement.
Mr. Lighthizer said, “Much still needs to be done, both before an agreement is reached, and more importantly, after it is reached.” He underlined the importance of the enforceability of any agreement by saying, “If we can complete this effort — and again I say ‘if’ — and can reach a satisfactory solution to the all-important outstanding issue of enforceability as well as some other concerns, we might be able to have an agreement that turns the corner in our economic relationship with China.”
On the importance of structural issues to a final deal, Mr. Lighthizer said that the issues on the table between the U.S. and China “are too serious to be resolved with promises of additional purchases” of soybeans and other U.S. products. He said, “We need new rules.”
The markets currently have no near-term timetable for the US/Chinese trade talks. If the two sides indeed have significant issues to resolve, then it would be the turn of U.S. officials to travel to China for another round of top-level talks. Regarding the tariff deadline, President Trump has not yet set a new deadline date. That means that the tariff-hike deferral is simply running on a day-to-day basis and that Mr. Trump could suddenly raise the tariffs at any time if he is not happy with how the negotiations are going.
The only time-reference at present is that Treasury Secretary Mnuchin said last week that tentative plans are being made for a Trump/Xi summit in late March at Mar-a-Lago. The question is whether 2-3 weeks is enough for Mr. Lighthizer to wrap up an agreement that can be presented to Trump-Xi at a signing summit in late March.
U.S. Q4 GDP expected to ease to +2.3% — The market consensus is for today’s Q4 GDP to ease to +2.3% (q/q annualized) from +3.4% in Q3 and +4.2% in Q2. U.S. GDP is starting to fall back to earth after the strong stimulus boost seen earlier in 2018 from the Jan 1 personal and corporate tax cuts. GDP was also undercut in Q4 by higher interest rates, which undercut the housing and auto sectors. The 35-day U.S. government shutdown that began on Dec 22 will also put at least a small dent in Q4 GDP.
There has been much talk about the possibility of a recession within the next year. However, there are no major signs of U.S. economic weakness as yet and the market consensus is for respectable GDP growth of about +2.2% this year. The case against a recession was bolstered after the Fed in January dropped its rate-hike regime and moved to a fully neutral policy. After fairly strong GDP growth this year, the consensus is for U.S. GDP growth in 2020-21 to fall back to the long-run U.S. potential GDP rate of about +1.8-1.9% as the tax-cut stimulus fully dissipates.
Brexit hardliners start to thaw on May’s Brexit plan — The odds have improved this week that Prime Minister May might be able to get her Brexit agreement approved by Parliament in the March 12 vote. Brexit-hardliner leader Jacob Rees-Mogg, head of the pro-Brexit European Research Group, said he would no longer insist that the Irish backstop be dropped. That raised the possibility that the EU might be able to make enough adjustments on the backstop language through a possible appendix to the separation agreement that UK Attorney General Cox could soften his previous legal conclusion that the Brexit separation plan could trap the UK in the EU indefinitely, the key fear of pro-Brexit members of Parliament.
Brexit hardliners this week have warmed to Ms. May’s separation agreement for two reasons. First, Parliament now has the power to prevent a “no deal” Brexit, which Brexit hardliners saw as their ace in the hole. Second, Ms. May has now given the opportunity to Parliament to vote for a delay in the March 29 Brexit deadline. If there is a delay, then Brexit hardliners fear that there might be no Brexit at all, particularly now that the Labour Party has made it their official policy to support a second public vote on Brexit.
Ms. May still has a long way to go to get a majority of Parliament to vote in favor or her separation agreement. However, the situation is now much more positive for the markets since there will either be a Brexit agreement or a delay of the March 29 Brexit deadline. The odds of a no-deal Brexit have now fallen to virtually nil. That is particularly the case since Parliament on Wednesday overwhelmingly passed the Cooper amendment that codified Ms. May’s promise that Parliament will be able to vote against a “no deal” Brexit if there is no agreement.
China Caixin manufacturing PMI expected to stabilize — The consensus is for today’s China Feb Caixin manufacturing PMI to show a small +0.2 point increase to 48.5, stabilizing after January’s sharp -1.4 drop to a 3-year low of 48.3. There are hopes that the Chinese economy may be starting to right itself based on (1) an easier monetary policy by the Chinese central bank and other stimulus measures taken by the Chinese government, and (2) improved business sentiment with the improved chances for a resolution of the US/Chinese trade war. Indeed, the Chinese stock market soared earlier this week after President Trump on Sunday announced the extension of the March 1 tariff-hike deadline.
