- China is pessimistic about a full trade deal but markets will be pleased with at least a near-term truce
- Markets wait to hear from Fed officials after Thursday’s hawkish rate cut
- U.S. payrolls expected to show reluctant hiring aside from GM strike distortion
- U.S. ISM manufacturing index expected to remain below 50
China is pessimistic about a full trade deal but markets will be pleased with at least a near-term truce — Bloomberg on Thursday reported Chinese sources as saying that China is pessimistic about a long-term trade deal. The report said that Chinese officials are highly reluctant to agree to big structural changes in their economic model, such as reducing subsidies for state-owned companies, particularly since the Trump administration appears unwilling to remove existing penalty tariffs.
The Trump administration says it needs to maintain those tariffs in order to ensure China’s compliance with a trade deal. However, maintaining those tariffs removes any incentive for China to agree to a deal in the first place. The Trump administration’s apparent intention of leaving tariffs in place even after a trade deal only strengthens China’s suspicion that the Trump administration’s ultimate goal is to decouple the U.S. and Chinese economies and make it more difficult for China to compete with America as a world economic and strategic power.
Yet the Bloomberg article also said that Chinese officials have every intention of trying to finalize the phase-one trade deal. That deal isn’t so much a trade deal as a means for China to pay off the Trump administration for a truce on any new tariffs such as the upcoming Dec 15 tariff of 15% on the last $160 billion of Chinese goods.
The question becomes whether China in a phase-one deal would get an airtight promise that President Trump would permanently scrap the Dec 15 tariff, or whether he would simply suspend the tariff with a threat to reimpose it in phase two of the trade negotiations if those talks go poorly. If that tariff is imposed next year, then China will have received virtually nothing for its phase-one concessions such as boosting its purchases of U.S. ag products and commitments on IP and currency stability.
Even if a phase one trade deal is signed and Mr. Trump removes the immediate threat of the Dec 15 tariff, the markets next year are still likely to suffer from the threat of new tariffs during phase two of the negotiations. The markets will be pleased if Mr. Trump defers the Dec 15 tariff, but the threat of new tariffs is not likely to disappear and will likely continue to plague the markets next year.
We expect continued US/Chinese trade strife next year as China drags its feet on any structural concessions as it waits to see if President Trump wins the November 2020 election.
Markets wait to hear from Fed officials after Thursday’s hawkish rate cut — The markets today will start hearing from Fed officials other than Fed Chair Powell about Thursday’s FOMC decision. Fed officials speaking today include Fed Vice Chair Richard Clarida (voter), NY Fed President John Williams (voter), San Francisco Fed President Mary Daley (non-voter), and Dallas Fed President Robert Kaplan (non-voter).
Hawks on the FOMC can be expected to stress their opinion in coming weeks that Thursday’s rate cut was the last in the cycle. Meanwhile, doves can be expected to say that they are open to further rate cuts if risks rise and the U.S. economy fades. The markets are discounting the odds for another rate cut at 50% at the next FOMC meeting on Dec 10-11 and at 80% at the following meeting on Jan 28-29.
U.S. payrolls expected to show reluctant hiring aside from GM strike distortion — The market consensus is for today’s Oct payroll report to weaken further to +85,000 from Sep’s poor report of +136,000. The underlying trend will be difficult to discern because of the 6-week GM strike that lasted through October involving 46,000 striking GM workers and an unknown number of workers at GM suppliers. The various blackouts in California could have also a caused some layoffs and a downward impact on the payroll report. On the plus side, the U.S. government is hiring for the census, which makes the private payroll report more important to watch.
Aside from the various distortions, the trend in hiring is downward as businesses show caution due to lower GDP growth and increased risks caused by weak overseas economic growth, the U.S. trade war, and U.S. political uncertainty. The 3-month moving average for payroll growth has fallen to +157,000 from last year’s strong pace of +223,000 when the economy was booming from the massive 2018 tax cut.
The consensus is for today’s Oct unemployment rate to rise by +0.1 point to 3.6% after September’s -0.2 point drop to a new 50-year low of 3.5%. Payroll growth has so far been strong enough to keep the unemployment rate from rising. However, if payroll growth continues to slide, then the unemployment rate will start edging higher.
The consensus is for today’s Oct average hourly earnings report to edge higher to +3.0% y/y from Sep’s +2.9%. Hourly earnings dipped to a 14-month low in September of +2.9%, down from February’s 10-year high of 3.4%. Hourly earnings growth continues to be only moderate as businesses are able to keep a wrap on wages despite the tight labor market.
U.S. ISM manufacturing index expected to remain below 50 –– The consensus is for today’s Oct ISM manufacturing index to show a +1.2 point increase to 49.0, recovering most of Sep’s -1.3 drop to a 10-year low of 47.8. The Oct ISM new orders sub-index in September rose by +0.1 point to 47.3 from Sep’s 10-year low of 47.2. The ISM manufacturing index has now been below the expansion-contraction level of 50.0 for the past two reporting months, helping to confirm that the U.S. manufacturing sector is in a recession. U.S. manufacturing production in Sep fell to a 3-year low of -0.9% y/y and was in negative territory for the third consecutive month.
