- Chinese stocks soar to 8-month high on fresh banking stimulus
- China has yet to confirm President Trump’s Jan 15 signing date for US/China trade deal
- FOMC minutes
- U.S. ISM manufacturing index expected to improve but remain below 50
Chinese stocks soar to 8-month high on fresh banking stimulus — The Shanghai Composite index on Thursday started off the New Year with a bang with a +1.15% rally to a new 8-month high. Chinese stocks rallied on the Chinese central bank’s move to add about 800 billion yuan ($115 billion) of bank-lending capacity to the Chinese banking system by cutting the large-bank reserve requirement ratio (RRR) by -50 bp to a 12-year low 12.50% starting January 6. The lower RRR means that banks can hold a reduced amount of reserves against their loans, thus improving bank liquidity and giving banks more capacity to make new loans.
The PBOC has slashed the RRR by a total of 5.50 percentage points over the past two years from the 17% level seen in 2016-17 as a means to stimulate the Chinese economy without explicitly cutting interest rates. Thursday’s cut in the RRR rate added to the recent stimulus move whereby the Chinese government in late December instructed banks to start basing their loans to corporations on the 1-year loan prime rate of 4.15%, which is -20 bp lower than the former benchmark rate of 4.35%.
Chinese investor optimism has improved going into the new year with the imminent signing of the US/Chinese phase-one trade deal. Investors are hoping that the Chinese economy can stabilize if President Trump is done slapping new tariffs on Chinese exports to the United States. In addition, President Trump’s 15% tariff on about $120 billion of Chinese goods (which was levied in September 2019) is scheduled to be slashed by half to 7.5% in February (30 days after the trade agreement is signed).
However, the Chinese economy in 2020 will still be laboring under the unchanged 25% U.S. tariff on the original $250 billion of Chinese goods. In addition, there is the risk that President Trump in 2020 might slap new tariffs or penalties on China if the phase-two trade talks proceed too slowly.
China has yet to confirm President Trump’s Jan 15 signing date for US/China trade deal — China as of Thursday evening had yet to confirm a signing date of January 15 for the US/China phase-one trade deal. President Trump on Tuesday tweeted that he will sign the US/China phase-one trade deal on January 15 at a ceremony at the White House with high-level Chinese officials. Mr. Trump also tweeted that, “At a later date I will be going to Beijing where talks will begin on phase two.”
The fact that China has not yet confirmed the Jan 15 signing date suggests that President Trump may have surprised Chinese officials with his signing offer. China’s understanding of the signing date may have been more in line with Monday’s China Morning Post report that Chinese Vice Premier Liu would travel to Washington this Saturday and stay in town until the middle of next week in order to sign the US/Chinese phase-one trade deal.
Whatever the signing plan turns out to be, the markets will be pleased when the phase-one trade agreement is signed since that would eliminate the possibility of any last-minute glitches on how the agreement should be interpreted.
The markets are waiting to see the details of the agreement, which will not be released to the public until the agreement is signed. The U.S. has claimed that China agreed to buy $40 billion of U.S. ag products annually in 2020 and 2021, and President Trump has claimed that the purchase obligation is even higher at $50 billion. China has yet to confirm any exact figures on agriculture purchases. China is expected to struggle to buy $40 billion of U.S. ag products in 2020 since that is far higher than the pre-tariff level of $24 billion seen in 2017 and the record high of $29 billion seen in 2013.
FOMC minutes — The FOMC today will release the minutes from its last meeting that took place on Dec 10-11. The FOMC at that meeting left its funds rate target unchanged at 1.50%/1.75%, breaking the string of three consecutive meetings at which the FOMC cut the funds rate by -25 bp. The FOMC at its Dec 10-11 meeting made clear that the Fed is on hold for the foreseeable future. In the Fed-dot forecasts from the December meeting, 14 of the 17 FOMC members predicted no change in the funds rate target during 2020, while four members predicted a +25 bp rate hike during 2020. No FOMC members agreed with the market consensus that the Fed in late 2020 will cut the funds rate by 25 bp.
The markets are hoping that today’s FOMC minutes will shed some additional light on the Fed’s program to boost its balance sheet and increase liquidity in the banking system by buying T-bills at the rate of $60 billion per month. That program started in October. The Fed’s balance sheet has risen by a total of $414 billion from August’s low.
U.S. ISM manufacturing index expected to improve but remain below 50 — The consensus is for today’s Dec ISM manufacturing index to show a +0.9 point increase to 49.0 after Nov’s -0.2 point decline to 48.1. The index has been below the expansion-contraction level of 50.0 for the last four reporting months and is only 0.3 points above September’s 10-year low of 47.8, illustrating the weak state of confidence in the U.S. manufacturing sector.
The U.S. manufacturing sector in the latter half of 2019 was in a recession as seen by the fact that U.S. manufacturing production fell on a year-on-year basis from July through the latest reporting month of November. Manufacturing production in November fell by -0.8% y/y, which was least a little better than the -1.7% y/y decline seen in October. There are some market hopes for an improvement in the U.S. manufacturing sector in 2020 once the US/Chinese phase-one trade deal is signed.
