Tags: trade | china | usmca | eurozone

U.S. Trade Deals Fail to Quell Uncertainty

U.S. Trade Deals Fail to Quell Uncertainty
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By    |   Monday, 16 December 2019 11:18 AM

The United States-Mexico-Canada trade agreement or USMCA (NAFTA 2.0) seems to have run into some problems. Mexico’s government is saying that the legislation before U.S. Congress includes provisions calling for the posting of up to five labor attachés to monitor Mexico’s labor reform that Mexico itself has not agreed to. Negotiators are due to meet in Washington to try and resolve this, Marketwatch reports.

This does perhaps have some implications beyond USMCA.

We know that the U.S.-China phase 1 trade deal runs to over 80 pages, but no one in the wider world has actually seen those pages as yet. The only thing that is public at this point is the fact sheet on the “Agreement between the United States and the People’s Republic of China – December 13, 2019” that was put on the website of the Office of the United States Trade Representative (USTR).

This sort of uncertainty is, no doubt, all part of the “art of the deal”. However, this sort of uncertainty does come with an economic cost. Part of that was on show in today’s Chinese economic data.

Chinese industrial production came in stronger than expected at 6.2 percent year-on-year in November, beating the median forecast of 5.0 percent. OK, that’s not a huge shock.

The global consumer is still spending with a reasonable level of strength.

Chinese retail sales were also stronger than expected, coming in at 8 percent year-on-year in November, following a 7.2 percent gain in October and above market estimates of a 7.6 percent increase. This marked the biggest rise in retail trade since June.

For investors it’s important to keep in mind that Chinese industrial production serves Chinese consumers far more than it serves global consumers.

However, investment spending in China increased 5.2 percent year-on-year in November, matching market consensus, but remaining the weakest reading on record.

Yes, that does matter globally. Almost half of the euro area’s exports to China are investment goods. So, weaker investment in China means weaker exports from the eurozone and weaker production in the eurozone, even if eurozone consumers are holding on fairly well.

In this context, the just released IHS Markit Flash Eurozone PMI is of interest for investors. Markit itself comments, “The Eurozone economy closes out 2019 mired in its worst spell since 2013, with businesses struggling against the headwinds of near-stagnant demand and gloomy prospects for the year ahead. The economy has been stuck in crawler gear for four straight months, with the PMI indicative of GDP growing at a quarterly rate of just 0.1 percent”.

Besides all that, the U.S. House of Representatives will vote on articles of impeachment against President Donald Trump. Financial markets expect that the president will be impeached, and generally speaking, financial markets do not care. The expectation is that the U.S. Senate will not convict President Donald Trump. The fact that the Senate majority leader is coordinating the trial with the White House would seem to hint at that. Relations between the White House and Congress can’t really deteriorate any further and the November 2020 presidential election is too far off to be a focus for financial markets and thus for investors.

In the meantime, the U.S. remains the best house in a bad neighborhood, which is confirmed by the just-released IHS Markit Flash U.S. Composite PMI that came in under the title “Business activity growth accelerates to five-month high”. The upward trajectory in the surveys support IHS Markit’s own expectations that the US economy is on course to see another year of above potential GDP growth of approximately 2.2 percent in 2020.

In the U.K., the aftermath of the election may get some attention in the financial markets as Prime Minister Boris Johnson will have to make some changes to the Cabinet in the near term, which may give a little hint as to the style of policy of the government, especially with respect to the European Union (EU).

The just released IHS Markit/CIPS Flash UK Composite PMI came in at 48.5, down from 49.3 in November, the second-lowest since April 2009. The report’s data hint a growing likelihood that the U.K. economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead up to the general election.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The United States-Mexico-Canada trade agreement or USMCA (NAFTA 2.0) seems to have run into some problems. Mexico's government is saying that the legislation before U.S. Congress includes provisions calling for the posting of up to five labor attachés to monitor Mexico's...
trade, china, usmca, eurozone
Monday, 16 December 2019 11:18 AM
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