BMA Market Insights: China Agrees to Strengthen the Protection of Intellectual Property Rights

Global rates and equities are rallying this morning after China announced it will raise penalties on violations of intellectual property rights, one of the major sticking points in the U.S.-China trade talks. Investors are RISK-ON after a pessimistic week that saw both the U.S. and China move farther apart on trade negotiation principles. Chinese media said both countries are “very close to a phase one trade deal.” The 2-year on-the-run US Treasury note is trading 2.1bps higher to 1.642% and the 10-year on-the-run US Treasury note is trading 1bps higher to 1.789%.

The Fed’s October meeting minutes revealed a more upbeat tone about the economy. The committee “generally viewed the economic outlook as positive” and how “resilient” the economy was in light of headwinds such as the U.S.-China trade war and slowing global economic growth. Chairman Powell reiterated that “if developments emerge that cause a material reassessment of our outlook, we would respond accordingly.” There was no definition of “material.” The Fed voted, 8-2, to cut rates by 25bps to a target range of 1.50% to 1.75%. USD 1-Month LIBOR, a highly correlated index, is currently set at 1.6995%.

U.S.-China Trade War

• Angering Beijing and further complicating U.S.-China trade talks, the U.S. Senate unanimously voted to pass the ‘Hong Kong Human Rights and Democracy Act’, which would ban the export of certain crowd-control munitions to the Hong Kong police forces and an annual certification that Hong Kong retains enough ‘autonomy’ to qualify for special U.S. trading considerations.
  • The proposed legislation will be sent to the House of Representatives for a vote and if passed, to President Trump to potentially sign.
• Last week, Chinese President Xi Jinping said China wants to work with the U.S.  towards a phase-one trade agreement that’s based in part on “equality.”
  • President Trump responded that “this can’t be an even deal, because we’re starting off on the floor and you’re already at the ceiling. So we have to have a much better deal.”
  • Markets sold off on the news.
• China imported 1.15 million tons of U.S. soybeans in October, the lowest level in three months.
  • China imported only 66,955 tons in October last year.
  • About 1.8 million tons of soybeans that are subject to 30% retaliatory tariffs are currently being held up at China’s ports.
• While there continues to be “bumps in the road”, there remains strong incentives for a phase-one trade deal to be completed.
  • Agriculture-based economies of the upper mid-west remain critical to Trump’s re-election.
  • Impeachment process may continue to distract and add pressure on Trump to do a trade deal.
• The highlights of the October 11 mini-deal principles are as follows:
  • China will purchase up to $50billion in U.S. agricultural goods.
    • China previously purchased approximately $9 billion in 2018, down from $25.8bn in 2012. 
  • China will boost intellectual protection, primarily for small and medium businesses.
  • China will commit to currency changes.
    • The agreement over currency will likely mirror commitments already made with the International Monetary Fund (IMF) standards.
  • The U.S. will suspend additional tariffs.
    • Tariffs on $250 billion of Chinese goods were supposed to go into effect last Tuesday, October 15.  

The Fed and Economic Data

• Last week’s reveal of the FOMC’s October meeting minutes showed the Fed “generally viewed the economic outlook as positive” and showed how “resilient” the economy was in light of headwinds such as the U.S.-China trade war and slowing global economic growth.
• The Fed’s current stance is that they will neither raise or lower interest rates until inflation meets its 2% target was reiterated by Fed Chair Jerome Powell,  at a testimony to the Joint Economic Committee of Congress.  
• The current policy target rate, the Fed Funds rate, the range is between 1.5% to 1.75%.

Key events coming up this week:

• Key U.S. economic indicators this week include:
  • Chicago Fed National Activity Index and Dallas Fed Manufacturing Activity today.
  • Case-Shiller home price index and new home sales on Tuesday.
  • GDP data and Chicago PMI on Wednesday.
• Fed Speak include Chair Jerome Powell on Monday evening and Lael Brainard on Tuesday afternoon.

We Wish Everyone a Great Thanksgiving Holiday!