- G20 meeting will focus mainly on global economic damage from coronavirus
- U.S. existing home sales expected to show a modest decline and remain generally strong
- European Feb business confidence expected to slide
G20 meeting will focus mainly on global economic damage from coronavirus — G-20 central bankers and finance ministers today begin a weekend meeting in Riyadh, Saudi Arabia. The two main challenges for global policymakers are currently trade tensions and the economic fall-out from the coronavirus.
US/China trade tensions are currently on hold as the two sides implement their phase-one trade deal that went into effect last Friday (Feb 14). The U.S. last Friday cut its tariffs in half to 7.5% on $120 billion of Chinese goods, and China cut its tariffs in half on $75 billion of U.S. goods. However, both sides left the rest of their penalty tariffs in place.
Moreover, the markets are worried about whether China will buy enough extra U.S. goods this year to satisfy President Trump. The markets are also nervous about the phase-two trade talks, although there seems no urgency for those talks to begin.
The main concern on the trade front has shifted to Europe. EU officials are currently trying to produce some concessions to satisfy President Trump’s demand for a reduced U.S. trade deficit with the EU and increased EU purchases of U.S. agriculture products.
EU Trade Commissioner Hogan has already been to Washington twice in recent weeks to try to get the ball rolling on trade talks. Mr. Hogan is also trying to pave the way for a visit to Washington by European Commission President Ursula von der Leyen. In the meantime, President Trump’s threat remains very much alive for U.S. tariffs on imported European vehicles.
The U.S. and the EU also have their ongoing spat over Airbus and Boeing subsidies. The Trump administration last Friday raised the U.S. tariff on EU aircraft to 15% from 10%.
US/India trade relations are also in the news. U.S. and Indian officials had hoped to reach some type of preliminary trade deal ahead of President Trump’s visit to India next week. However, USTR Lighthizer canceled his trip to India last week, presumably because the trade talks had stalled. President Trump said earlier this week that a major trade deal with India would likely have to wait until after the U.S. November election.
The even bigger challenge for global policymakers is the coronavirus. The U.S. stock market on Thursday sold off on concern about how the virus has been spreading outside China. There were two deaths from the coronavirus this week in Japan and one in South Korea. Officials in Hubei, the epicenter of the virus, told businesses to remain closed at least through March 11. Confirmed cases of the coronavirus have now jumped to 75,730, with 2,129 deaths.
Global central banks have so far just been watching to see how much economic damage results from the coronavirus. The Fed has noted that the coronavirus is a downside risk but says it is too early to assess whether the virus will require a policy response. In the meantime, the Fed is satisfied with the current state of U.S. monetary policy.
The ECB is dealing with an EU manufacturing sector recession, as well as economic fallout from the coronavirus. The EU is also dealing with what it views as unrealistic demands from the UK for a free-trade deal by year-end.
In Japan, the economy took a hit in Q4 from the hike in the sales tax to 10% from 8% on October 1. The Japanese economy is now dealing with the threats from the coronavirus after news that two people in Japan died from the disease.
The Chinese central bank has so far responded to the coronavirus crisis with targeted measures and not with a sweeping easing of monetary policy. The People’s Bank of China has so far cut interest rates by only -10 bp. The PBOC is limited in its ability to cut interest rates because it does not want to spark a run on the yuan, which in turn could spark capital flight and a sharp drop in stocks. The PBOC also does not want to spark a new debt binge that must be cleaned up later.
U.S. existing home sales expected to show a modest decline and remain generally strong — The consensus is for today’s Jan existing home sales report to show a decline of -1.7% to 5.45 million, reversing about half of Dec’s +3.6% rise to 5.54 million. Existing home sales in December rose to a 1-3/4 year high and were only 1.8% below the 12-3/4 year high of 5.64 million units posted in Nov 2017.
U.S. home sales continue to see strength based on strong consumer confidence and low mortgage rates. The current 30-year mortgage rate of 3.49% is only 4 bp above 3-1/4 year low of 3.45% posted in early February.
European Feb business confidence expected to slide — The market consensus is for today’s Feb European PMI reports to show weaker European business confidence. Negative factors for business confidence include the coronavirus, US/EU trade tensions, the European manufacturing recession, and political tensions in various EU countries.
The consensus is for today’s Eurozone Feb Markit manufacturing PMI to fall by -0.5 to 47.4, reversing about a third of Jan’s +1.6 point recovery to 47.9 and keeping the index well below the expansion-contraction level of 50.0. The German Markit manufacturing PMI is expected to slide by -0.5 points to an even lower 44.8, following Jan’s report of +1.6 to 45.3. The German Markit services PMI is expected to slide by -0.4 points to 53.8 after Jan’s report of +1.3 to 54.2.
