BMA Market Insights: Trump Throws Cold Water on Trade Talks

Phase-one of the U.S.-China trade deal was originally planned to be finalized and signed this past weekend at the APEC Summit in Chile. With the cancellation of the summit, December 15 is the unofficial new “deadline”. Barring an extension, tariffs on cellphones, apparel, and other Chinese merchandise are set to go into effect on December 15. 

Comments on trade were relatively muted last week with President Trump, on Tuesday, failing to address investor concerns over rollbacks on U.S. tariffs on Chinese goods. However, the trading week ended positively as White House economic adviser Larry Kudlow commented that the trade talks were nearing the final stages. USD rates and U.S. equity futures are trading modestly higher in pre-market open with the 3-year on-the-run U.S. Treasury note trading 3.3bps higher to yield 1.632%. The 10-year U.S. Treasury note is relatively unchanged at +0.001% to 1.843%. 1-Month LIBOR set at 1.72363% this morning.

U.S.-China Trade War

• The White House’s economic adviser Larry Kudlow said on Friday that U.S.-China trade talks were nearing the final stages. The Chinese Commerce Ministry echoed the sentiment on Saturday that said negotiators from both sides held “constructive discussions” addressing both countries’ core concerns over the phase-one trade deal.
• Trump, on Tuesday, spoke at the Economic Club of New York but failed to address the status of the U.S.-China trade talks as many economists and investors had hoped.
  • Trump had said earlier that he hasn’t decided to lift or reduce any tariffs on Chinese goods, one day after a Chinese government official said the two sides had agreed on that.
  • Trump focused on his 2020 re-election campaign reinforcing that his policies have generated a boom in economic growth and employment.
• 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

• The current stance that the Fed 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, last Wednesday and Thursday.
• Global growth, trade developments, and persistently low inflation could lead to an “unwelcome” slide in longer-run inflation expectations.
• The current policy target rate range is between 1.5% to 1.75%
  • 1-Month LIBOR, a highly correlated index, is currently trading at the upper end of the target at 1.72363%.

Key events coming up this week:

• Key U.S. economic indicators this week include:
  • Foreign holdings of U.S. Treasuries – Monday (Today).
  • Housing Starts (Tuesday).
  • Initial Jobless Claims (Thursday).
• Fed Speak include John Williams, Loretta Mester, and Neel Kashkari.