- Markets wait to see the fine print of the US/China trade deal
- Senate set to approve USMCA on Thursday
- U.S. core PPI expected to be steady
Markets wait to see the fine print of the US/China trade deal — The US/China phase-one trade deal is scheduled to be signed today at a ceremony at the White House. The markets are hopeful that the phase-one trade deal will hold as a ceasefire during 2020 despite what is likely to be a difficult round of phase-two trade talks.
The stock market was undercut on Tuesday by a Bloomberg report that the Trump administration does not plan to cut tariffs on Chinese goods any further before November’s presidential election. Some market participants had apparently held out some hope that the Trump administration might roll back tariffs on Chinese goods later this year if China meets its commitments under the phase-one trade deal, including the purchase of U.S. goods. Instead, Bloomberg reported that there is an unwritten US/China understanding that the U.S. will not consider any tariff cuts for at least 10 months (i.e., mid-November) as the Trump administration waits to see if China meets its obligations under the phase-one trade agreement.
The cut in the 15% tariff on about $120 billion of Chinese goods to 7.5% is still due to go into effect 30 days from today’s signing date, as agreed to in the phase-one trade deal, according to Bloomberg. The 25% tariff on the original $250 billion of Chinese goods will remain in effect after today’s trade deal, as planned. China under the phase-one trade deal has agreed to provide exemptions on its tariffs as necessary to meet its purchase requirements for U.S. goods.
The markets are waiting to see the fine print of the 86-page phase-one trade agreement, which will be released today as part of the signing process. The markets are waiting to see exactly what China agreed to regarding the purchase of American products. However, that information may still not be released to the public because it is contained in a confidential annex. The markets have many questions as to the quantity and enforceability of Chinese promises to buy U.S. goods. The markets also have questions about whether those promises are structured so they do not violate WTO rules.
The markets today will be on guard for any comments from President Trump about the phase-two trade talks and whether he issues any new threats of tariffs or penalties to enhance his bargaining position. Mr. Trump recently said that phase-two talks will begin immediately but that an agreement might have to wait until after the election. That sparked market hopes that Mr. Trump will take a more relaxed approach to phase-two talks and may not raise the pressure on China in an attempt to force a phase-two trade deal before November’s election. The markets will also be assessing whether the phase-two talks will be intensive or whether the administration will simply delay serious talks until after the election.
Senate set to approve USMCA on Thursday — Senate Majority Leader McConnell on Tuesday said that the Senate is on track to pass the USMCA on Thursday before President Trump’s impeachment trial begins next week. The approval of USMCA by the remaining Senate committees is expected to take place today.
The Senate’s approval of the USMCA on Thursday would complete the Congressional approval process since the House already passed the bill last month. The markets will be pleased with the final Congressional approval of the USMCA since that could spark a burst of new investment once businesses are certain about the new rules for North American trade.
Meanwhile on impeachment, the House today is expected to vote on the resolutions needed to formally transmit the articles of impeachment to the Senate and name the House managers who will prosecute the case in the Senate.
Senate Majority Leader McConnell said that opening arguments in the Senate impeachment trial could begin this coming Tuesday. Mr. McConnell said housekeeping items, such as the swearing-in of Senators as jurors, are likely later this week. The Senate’s trial of President Trump is expected to last 2-3 weeks and possibly longer depending on whether witnesses are called and whether new evidence is allowed.
U.S. core PPI expected to be steady — The consensus is for today’s Dec final-demand PPI to rise to +1.3% y/y from Nov’s +1.1%, but for the Dec core PPI to be unchanged at +1.3% y/y. The rise in the headline PPI is expected to be driven by December’s +11% rally in crude oil prices that was sparked by the unexpected move by OPEC+ to cut its production by 1.7 million bpd in Q1-2020, up from the 2019 production cut of 1.2 million bpd.
Expectations for today’s PPI report were supported by yesterday’s Dec CPI report, which showed an increase to +2.3% y/y from Nov’s +2.1% for the headline CPI but an unchanged core CPI at +2.3% y/y.
Market expectations for inflation have risen in the past several months but not to a level that will spark concerns at the Fed. The current 10-year breakeven inflation expectations rate has risen sharply to the current level of 1.78% from Oct’s 3-1/4 year low of 1.47% but is still well below the Fed’s +2.0% inflation target.
Meanwhile, the Nov core PCE deflator (the Fed’s preferred inflation measure) remained low at +1.6% y/y in November, illustrating that there is no current pressure on the Fed to raise interest rates based on the inflation outlook. In fact, the Fed wants inflation to go above 2.0% since it says its 2.0% inflation target is symmetrical, meaning that inflation should periodically trade above the 2% target.
