- Weekly global market focus
- Busy week for Congress before Friday’s recessÂ
- US/Chinese tariffs unchanged until the 15% tariff is halved in February
Weekly global market focus — The U.S. markets this week will focus on (1) any further details about last Friday’s US/China first-phase trade agreement, (2) the possibility of a hitch in the USMCA agreement as Mexico on Sunday objected to U.S. labor-condition monitors, (3) a busy week in Washington with events including votes on impeachment, USMCA, and fiscal 2020 spending bills, (4) whether the Fed has done enough to offset year-end money market tightness, (5) earnings reports from 11 of the S&P companies including FedEx and Nike, (6) the Treasury’s sale of 5-year TIPS on Thursday, and (7) a very busy U.S. economic calendar with housing reports, Tuesday’s Nov manufacturing production report, and Friday’s Q3 GDP revision, consumer sentiment, and PCE deflator reports.
In Europe, the focus will be on key economic data including today’s Dec Eurozone Markit manufacturing PMI (expected +0.4 to 47.3 after Nov’s +1.0 to 46.9), Wednesday’s German Dec IFO business climate index (expected +0.5 to 95.5), and Friday’s Dec Eurozone consumer confidence index (expected +0.1 to -7.1).
In the UK, the focus will be on Thursday’s BOE meeting, which is expected to produce an unchanged policy. The UK Parliament will reconvene this week, but is not expected to deliver a final vote on Brexit until January. The markets are confident that Prime Minister Johnson will be able to push his Brexit withdrawal bill through Parliament by the Jan 31 Brexit deadline after last week’s landslide victory.
The Asian markets today will react to the US/Chinese phase-one trade deal, which was confirmed after the Asian markets closed on Friday. The Bank of Japan on Thursday is expected to announce an unchanged policy at its regular policy meeting. The Chinese markets today will react to Sunday night’s Nov industrial production and retail sales reports, which were expected to show mild improvements from October.
Busy week for Congress before Friday’s recess — Congress has a very busy week ahead of Friday’s recess for the holidays. The highest profile event will be the House impeachment vote that is expected on Wednesday and is expected to lead to a Senate trial in January.
On Tuesday, the House is expected to take up the spending bills to fund the government for the remainder of the fiscal year through Sep 2020. The House will then forward the spending bills to the Senate for its approval. In the unlikely event that a spending bill is not approved by Friday when the current continuing resolution expires, then there will be a federal government shutdown starting this Saturday. There was a bipartisan spending agreement by Congressional negotiators last Thursday, but there is still some doubt as to whether President Trump will sign a spending bill depending on provisions for wall spending.
The House this week is expected to approve the USMCA treaty, which would be a positive development for the markets. Senate Majority Leader McConnell said the Senate will take up the USMCA treaty in early 2020 after the impeachment trial. Senate Republicans are expected to approve the USMCA even though there has been griping about some of the terms in the deal that were revised to meet the demands of House Democrats.
US/Chinese tariffs unchanged until the 15% tariff is halved in February — The markets were relieved by the US/Chinese phase-one trade deal that was announced last Friday, which led to President Trump scrapping Sunday’s scheduled 15% tariff on $160 billion Chinese goods.
The phase-one trade deal also included a reduction of the existing tariff on about $120 billion worth of Chinese goods from 15% to 7.5%. However, that tariff reduction will apparently not take effect until February. The plan is for USTR Lighthizer and Chinese Vice Premier Liu to sign the trade deal in early January and then for the trade deal to take effect 30 days later, leading to the tariff cut in February. Until then, there will apparently be no change in existing U.S. tariffs.
Despite the trade agreement, the 25% tariff on the original $250 billion of Chinese goods will remain in place. China in the trade deal did not commit to eliminating its existing tariffs, although China does plan to boost tariff exclusions on U.S. ag products so that Chinese companies can boost their purchases of those ag products.
As part of the trade deal, the U.S. said China agreed to boost its purchases of U.S. ag products to $40 billion annually in 2020 and 2021, and on an aspirational basis to $50 billion as claimed by President Trump. Purchases of that size will be challenging since Chinese ag purchases in 2017, the last full year before tariffs, were only $24 billion and the record high was $29 billion in 2013.
Moreover, Chinese officials refused to mention any dollar amounts in their comments on the trade agreement and said only that they agreed to “notable” increases. The lack of clear purchase requirements could cause problems down the road since President Trump could threaten to reimpose sanctions if he thinks China is not buying enough U.S. ag products.
The markets were pleased with last Friday’s trade deal since it averted Sunday’s tariffs and will cut existing tariffs in half to 7.5% on $120 billion of Chinese goods. However, the tariff reduction was relatively small and will only have a modestly positive impact on US/Chinese trade. Attention now turns to phase two trade talks, which USTR Lighthizer said have not yet been scheduled. The markets can hope that the truce represented by the phase-one trade deal holds and that there will be no new US/China tariffs during 2020.
