December will be another busy month- Markets wait to see if trade talks are disrupted by Trump’s approval of the Hong Kong bill
- Eurozone CPI expected to remain far below target
December will be another busy month — December will be another busy news month with the potential for heightened volatility. The headline event is, of course, the US/Chinese trade talks, which face a deadline of December 15 when the new U.S. tariff is due to go into effect. The two sides claim to be close to an agreement but seem to have some major issues remaining on IP, technology transfers, and tariff rollbacks. The markets will probably take it in stride if a trade deal slips into January as long as President Trump defers the Dec 15 tariff. On the other hand, if the US/Chinese trade talks should unexpectedly collapse, then the global stock markets will be in for some rough sledding.
The USMCA is another source of trade uncertainty. The Trump administration is making a strong push to get a final deal done with House Democrats so that the USMCA can get approved in a House vote by late this year or at worst in early 2020. U.S. trade negotiators met with their Mexican and Canadian counterparts on Wednesday to try to get the treaty revisions that are being requested by House Democrats approved.
Washington politics will provide another source of uncertainty in December with impeachment hearings starting next Wednesday in the House Judiciary Committee. House Speaker Pelosi has suggested that she is aiming for a House impeachment vote before the Christmas break but that could also easily slip into January, particularly if there are a substantial number of hearings or new witnesses. On the Washington politics front, there is also the potential for a U.S. government shutdown when the current continuing resolution expires on Dec 20.
Crude oil prices will be in the spotlight as OPEC and OPEC+ meet next Thursday and Friday. The consensus is that OPEC+ will reaffirm its current production cut agreement of 1.2 million bpd, which is already scheduled to remain in effect through March 2020. Assuming OPEC+ does not cut production further, the markets will be watching to see if an expected oil surplus in the first half of 2020 puts downward pressure on oil prices, which have been trading in an unnaturally narrow range since May.
FOMC policy is expected to be uneventful in the coming weeks as long as there is no breakdown in the US/Chinese trade talks. The market is discounting virtually no chance of a rate cut at the FOMC meeting in 1-1/2 weeks on Dec 10-11 since the Fed’s clear guidance is that policy is on hold for the time being.
Overseas, the big event is the UK general election on Dec 12. If the Conservatives win a majority of votes in the election, in line with the 65% betting probability, then Prime Minister Johnson says he has the votes to get his Brexit withdrawal bill through Parliament by the Brexit deadline of January 31. That would remove the immediate threat of a no-deal Brexit. However, the question would then become whether PM Johnson can negotiate a quick trade deal with the EU to avoid a no-deal Brexit on Jan 31, 2020, since Mr. Johnson says he would not agree to extend the transition deadline to provide more time for trade negotiations.
In China, the markets will continue to closely watch the Hong Kong protests. If the Chinese government calls in the military and cracks down violently on protesters, there could be some fallout for the US/Chinese trade talks and new damage to China’s relations with the U.S. and Europe.
Markets wait to see if trade talks are disrupted by Trump’s approval of the Hong Kong bill — President Trump late Wednesday afternoon, just before Thursday’s Thanksgiving holiday, signed the Hong Kong bill passed by Congress last week. Mr. Trump was under pressure to sign the bill since Congress passed the bill by nearly unanimous margins, meaning they could easily override a presidential veto.
The question now is whether there will be any repercussions for the Chinese trade talks from the U.S. passage of the Hong Kong bill, which China views as interference into its sovereign affairs. The market consensus seems to be that China will stick to vague threats and will not to anything to damage the trade talks.
Eurozone CPI expected to remain far below target — The market consensus is for today’s Eurozone Nov CPI to rise slightly to +0.9% y/y from Oct’s +0.7% and for the core CPI to rise slightly to +1.2% y/y from Oct’s +1.1%. The expected rise in the CPI, however, will not reduce the ECB’s concern about low inflation and will not have any significant impact on the ECB’s policy direction.
The current Eurozone core CPI of +1.1% y/y is far below the ECB’s inflation target of just under 2% and the CPI is not expected to rise to the ECB’s target for a matter of years. The ECB back in September cut its deposit rate by -10 bp to -0.50% and the ECB on Nov 1 resumed its QE program with security purchases of 20 billion euros per month. The ECB’s guidance is that rates will remain at current or lower levels until inflation “robustly converges” to the inflation target of just below 2%, and that its QE program will remain in place until “shortly before” the ECB starts raising interest rates.
Nov China PMI expected to improve slightly — The consensus is for tonight’s China Nov manufacturing PMI to show a +0.2 point increase to 49.5, stabilizing after Oct’s -0.5 point decline to 49.3, where the index was only 0.1 point above Feb’s 3-3/4 year low of 49.2. China’s manufacturing PMI has been below the expansion-contraction level of 50.0 for the past six months. Meanwhile, tonight’s Nov non-manufacturing PMI is expected to rise +0.3 to 53.1 after Oct’s -0.9 decline to a 14-month low of 52.8. On Sunday night, China’s Nov Caixin manufacturing PMI is expected to fall by -0.5 points to 51.2 after Oct’s +0.3 point increase to 51.7.
