Five Minute Macro 12-16-2019

#1 US-China Trade Détente / USMCA Resolution

Last Week: #2

  • After weeks of mixed messages from US and Chinese officials over the state of negotiations, both sides affirmed on Friday that a Phase One deal has been reached, although some final terms need to be rectified.
  • The US agreed to partial removal of existing tariffs on Chinese imports and cancellation of scheduled duty increases consumer-facing products. But the White House will retain some tariffs as leverage in the Phase Two talks, though investors suspect that no additional agreement is likely before the November 2020 elections. China agreed to some degree of increased US farm imports. Enforcement procedures are also said to be included, alongside intellectual property, structural reforms, and currency policy terms.
  • Also, Congress is expected to pass the US-Mexico-Canada trade agreement this week.

#2 Hopes for a Global Growth Rebound Amid Mixed Data

Last Week: #1

  • The major upside surprise in US payrolls data for November further eased concerns over a worldwide growth slowdown, although last month’s US retail sales were disappointing. Other recent indicators, including preliminary December manufacturing and service sector purchasing managers’ indexes (PMIs), have also been mixed but broadly suggest that the global industrial recession may be bottoming out with limited spillovers.
  • China’s November trade figures remained depressed but industrial production, retail sales, and fixed asset investment figures reflected improvement. Recent credit extension figures also rebounded after poor October figures.
  • Expectations for a lasting US-China tariff truce and the year-to-date monetary easing by global central banks have kindled hopes for a medium-term worldwide growth rebound.

#3 Clarity on UK Politics and Brexit

Last Week: #3

  • UK equities and the pound surged last week as Thursday’s decisive general election result dispelled uncertainty over domestic politics and clarified the outlook for Brexit.
  • The Conservative Party dramatically outperformed expectations in yesterday’s UK general election, taking the largest majority in the House of Commons since 1987. PM Johnson will use his renewed mandate to finalize the UK’s exit the EU in January as well as arrange a fiscal stimulus package. He is also expected to pursue EU & US trade deals.
  • Since the election, the pound advanced 1.2% to a nineteen-month high versus the dollar while domestically-focused UK equities outperformed as well. Yields on UK sovereign bonds are relatively steady, however, and futures markets still assign around 50/50 odds of a rate cut by the Bank of England next year and no chance of a hike.

#4 Fed / Global Central Bank Monetary Policy

Last Week: #4

  • Despite muddled US and global economic figures and some lingering uncertainty over the progress toward a US-China Phase One trade deal, the Fed held interest rates at its meeting last week. At the October meeting, the Fed had cut interest rates for a third consecutive time by 25 basis points to a range of 1.50-1.75%.
  • Fed communications signal a pause in the easing cycle but aside from persistently strong jobs numbers, US growth data has been mixed and futures reflect meaningful odds of another rate cut or two next year. The restart of Fed asset purchases to grow its balance sheet has taken some of the pressure off interest rate policy.
  • The European Central Bank also remained on hold last week and analysts noted balanced accompanying communications by newly-minted President Lagarde.

#5 US Political Uncertainty

Last Week: Not Ranked

  • US impeachment drama and the Democratic campaign spectacle are thus far having scant market impact but investors are monitoring developments closely.
  • Ongoing protests in Hong Kong continue to impact local stocks, with the escalating violence weighing persistently on the benchmark Hang Seng for year-to-date gains of 6% versus 27% for the S&P 500, with traders also noting some bets against the HK dollar peg.
  • The Hong Kong Human Rights and Democracy Act was resoundingly approved in Congress and signed by President Trump, drawing the ire of Beijing and some retaliatory measures, though these steered clear of any trade-related actions.
  • Unrest in Chile has dented the peso and lifted copper prices; President Morales’ ouster in Bolivia, as well as protests in Catalonia and Beirut, are also noted.