Tags: China | Trump Administration | trump | china | trade | investors | risk

Trump Seeks Trade Deal, Needs China as 2020 Fodder

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Friday, 22 February 2019 10:18 AM Current | Bio | Archive

President Donald Trump will meet today at the White House with Chinese Vice Premier Liu He, who is leading the trade talks that are going on with U.S. officials in Washington.

Markets expect some serious discussion around the magic date of March 1 when Trump intends to increase tariffs on goods partially made in China, Reuters reported.

Markets would now be surprised if those tariff increases were to go ahead. Obviously, markets would be negatively surprised, as the way trade tariffs work is as a tax on equities.

The risks around the Donald Trump – Liu He meeting are therefore asymmetric. Good news on trade is modestly good news for financial markets. Bad news on trade is really bad news for markets. Very good news on trade, for example a comprehensive trade deal that really changes things seems unlikely.

Trump is clearly very keen to get something signed, but that still could be useful to criticize China in the 2020 election campaign.

Meanwhile, you cannot turn around today without bumping into a member of the Federal Reserve giving his or her remarks. We’ll have San Francisco Fed President Mary Daly, New York Fed President John Williams, Fed Vice Chairman for Supervision Randal Quarles, St. Louis Fed President James Bullard and Philadelphia Fed Chairman Patrick Harker that are all scheduled to give their remarks today.

New York Fed President John Williams is probably the one worth listening to most closely. Williams is perhaps the leading economic voice in the Federal Reserve that is run by Fed Chair Jerome Powell who is a lawyer. Williams will give his remarks on the topic of inflation and that is a topic that is exciting enough to write a book about plus inflation almost certainly has to move above 2 percent on the Fed’s target measure to get to the next Fed funds interest rate hike.

Yesterday we got the IHS Markit Flash U.S. PMI wherefrom we learned that the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index picked up from 54.4 in January to 55.8 in February (above 50 means expansion), which signaled the strongest rate of private sector output expansion since June 2018.

Tim Moore, Associate Director at IHS Markit commented that the February data provides a positive signal for first quarter economic growth, with U.S. businesses reporting the fastest output expansion since the middle of 2018. Service sector firms led the way, supported by solid improvements in business and consumer spending. Private sector payroll numbers increased to the greatest extent for five months, which adds to hopes that robust domestic demand will act as a growth tailwind over the near-term.

Relatively strong domestic business conditions mean that U.S. manufacturers remain on a much more positive trajectory than the recent downbeat production trends signaled by IHS Markit’s Manufacturing PMI surveys across Europe and Asia.

From the Euro Area we got today the annual (y/y) inflation data that came in at 1.4 percent while the Harmonized Index of Consumer Prices (HICP) index, which is the data the ECB looks at, came in at 1.1 percent y/y. Both inflation measures remain well below the ECB’s inflation target of below, but close to 2 percent over the medium term.

These data will certainly not excite financial markets as well as the ECB that will meet within a couple of weeks on March 11.

Investors could do well keeping in mind that the ECB could announce on its March 11 meeting an extension, in one form or another, of its monetary policy easing.

Besides that, there will probably be some interest around German GDP growth that stagnated in the fourth quarter of 2018 after a 0.2 percent contraction in the previous July-September period, which was the first time that German GDP shrank since 2015.

Interestingly, these GDP data were confirmed in some way by yesterday’s German IHS Markit Flash PMI that came in at 47.6 in February, which was a 74-month low, against 49.7 in January (blow 50 means contraction). Phil Smith, Principal Economist at IHS Markit observed that Germany’s manufacturing and service sectors remain on very different paths. While strong fundamentals in the domestic market are driving growth in services business activity, falling exports continue to weigh on the performance of the manufacturing sector. Measured overall, the data remain indicative of a very modest rate of underlying German output growth.

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

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The risks around the Donald Trump – Liu He meeting are therefore asymmetric. Good news on trade is modestly good news for financial markets. Bad news on trade is really bad news for markets. Very good news on trade, for example a comprehensive trade deal that really changes things seems unlikely.
trump, china, trade, investors, risk
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2019-18-22
Friday, 22 February 2019 10:18 AM
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