BMA Market Insights: Is the Global Economy on the Rebound?

After a relatively quiet Thanksgiving holiday trading week in the U.S., investors are kicking off December with a RISK-ON sentiment. Hopes that the global economy is finally turning a corner after manufacturing data from both the euro area and China beat investor expectations. Headlines of strong, record-breaking Black Friday retail sales of $7.4billion and estimates for a year-over-year 19% increase in Cyber Monday retail sales also helped propel U.S. Treasury yields and equity futures higher. The 10-year U.S. Treasury note is trading 6bps higher to 1.837%.

Further pushing the global trade renegotiations using tariffs, President Trump tweeted this morning that the U.S. will be reinstating tariffs on aluminum and steel from Argentina and Brazil. Both countries have previously been criticized for cheapening their currencies. President Trump also reiterated to Fed Chairman Powell and the FOMC to “lower rates and loosen” monetary policy. While a direct currency war hasn’t occurred, this will be the first time Trump has linked tariffs directly to currency devaluations, a potential new battlefront for President Trump’s trade wars using the foreign exchange (FX) markets.

U.S.-China Trade War

• The United States is poised to impose an additional 15% tariff on about $156 billion of Chinese products on Dec. 15.
• President Trump signed into law, last Wednesday (Nov. 27), the ‘Hong Kong Human Rights and Democracy Act’, which bans the export of certain crowd-control munitions to the Hong Kong SAR police forces and an annual certification that Hong Kong retains enough ‘autonomy’ to qualify for special U.S. trading considerations.
  • Investors’ feared that the signing of the legislation would derail phase-one of the trade negotiations. 
• China retaliates, though measures are relatively mild and are not expected to derail the trade negotiations, in its current form. The retaliations are as follows:
  • Sanctions on U.S. based non-business, non-governmental organizations devoted to human rights monitoring.
  • Barring U.S. warships from port visits to Hong Kong, commonly an R&R destination.
• 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. 

Key events coming up this week:

• Key U.S. economic indicators this week include:
  • Manufacturing PMI today.
  • ADP Nonfarm Employment data and ISM Non-Manufacturing PMI for November on Wednesday.
  • November Jobs data and the Unemployment Rate on Friday.