Select Page


 

  • Crunch time for US/Chinese trade relations
  • NAFTA 2.0 scheduled to be signed today
  • FOMC minutes contain surprise news of possible IOER cut before next meeting
 

Crunch time for US/Chinese trade relations — The markets are braced for whether Presidents Trump and Xi at their dinner meeting on Saturday in Buenos Aires following the G-20 meeting will agree on some type of cease-fire to avoid any new tariffs and allow time for formal negotiations.

The WSJ on Thursday reported that US and Chinese officials have been discussing a deal whereby the U.S. would delay any new tariffs until spring in return for a “framework” for formal trade talks that would involve major concessions from China.  The article said there have also been discussions about rolling back some current penalty tariffs.

Just before leaving for the G-20 meeting on Thursday, President Trump gave conflicting signals about whether there will be a US/Chinese trade deal in Buenos Aires.  Mr. Trump said that the U.S. and China are “very close” to a deal but added, “I don’t know if we want to do it.  I’m open to making a deal, but frankly, I like the deal we have now.”

The stock market seems to be fairly confident that there will be a cease-fire agreement considering that the market has been trading on offense this week.  However, that means that there is no room for disappointment from Saturday’s meeting.  The stock market would likely fall sharply on Monday if the US/Chinese talks fall apart with no agreement since that would undoubtedly mean that Mr. Trump would go ahead with his current plan to raise the tariff to 25% from 10% on Jan 1 on $200 billion of Chinese goods, and to slap a 10% or 25% tariff on the remaining $267 billion of Chinese goods.

If there is a cease-fire agreement this weekend, the markets will be pleased but will remain on guard since a cease fire could easily fall apart at any time if Mr. Trump is not satisfied with the pace of the negotiations.  Even now, the Trump administration is making noises about slapping tariffs on European and Japanese autos even though Mr. Trump agreed not to impose any new tariffs while negotiations are in progress.  

There is also the outside possibility of a major upside surprise from the meeting if the two sides decide to roll back all or some of their existing penalty tariffs.  That would suggest that the two sides might be closer to a long-term comprehensive agreement than the markets previously thought.

Mr. Trump will have a full panoply of advisors attending Saturday’s dinner.  Bloomberg reported that the dinner will be attended on the U.S. side by son-in-law Jared Kushner, Secretary of State Pompeo, USTR Lighthizer, Treasury Secretary Mnuchin, National Security Advisor Bolton, and White House economic advisor Kudlow.  Bloomberg and Reuters both reported that White House trade advisor Navarro received a last-minute invite to the dinner at the behest of USTR Lighthizer, which could perhaps make a deal more difficult since Mr. Trump’s instincts seem to lie more with trade hawks Lighthizer-Navarro than with moderates Mnuchin-Kudlow. 

 

NAFTA 2.0 scheduled to be signed today — The U.S., Canada and Mexico today are scheduled to sign the NAFTA 2.0 agreement.  In a display of continued trade tensions, however, the agreement may only be signed at the ministerial level rather than by heads of state.  Canadian Prime Minister Trudeau in particular is irked that President Trump has yet to remove tariffs on Canadian steel and aluminum as the U.S. seeks to replace those tariffs with quotas.

The markets are pleased that there is a NAFTA 2.0 agreement in place at the leadership level, even though the agreement will not become final until it is ratified by the respective legislatures.  President Trump may have trouble getting Congress to approve the deal considering that Democrats will have control of the House starting in January.

FOMC minutes contain surprise news of possible IOER cut before next meeting — Yesterday’s minutes from the Nov 7-8 FOMC meeting were considered mildly bullish since they supported the idea that the Fed may pause its rate-hike regime in 2019 to assess incoming data.  The minutes essentially confirmed that there will be another rate hike at the next FOMC meeting on Dec 18-19 by saying, “Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon.”

However, the minutes also said that FOMC members discussed how to shift the language on their interest rate expectations for “further gradual increases” to new language that indicates that the FOMC is not on a preset path and that further rate hikes will depend on incoming data.  Once the FOMC jettisons its path of “further gradual increases,” then members can pause the rate-hike regime at any time if it becomes necessary due to increased domestic and global risks. 

The only real surprise in the minutes was that Fed Chair Powell made a comment that the FOMC might need to cut the IOER (interest on excess reserves) rate prior to the next FOMC meeting in December.  The IOER is currently set at 2.20% and the funds rate has recently been locked at that level, which is near the upper end of the target range of 2.00%/2.25%.  The FOMC ideally wants the funds rate trading more towards the mid-point of the range of 2.13%.

The markets were surprised by the idea that the FOMC might cut the IOER rate by 5 bp to 2.15% before the next meeting since that would likely confuse some investors.  The more likely scenario is that when the FOMC at its next meeting on Dec 18-19 raises its funds target range by +25 bp to 2.25%/2.50%, the FOMC will raise its IOER rate by only 20 bp to 2.40%, which would cap the funds rate at 2.40% and keep it closer to the new 2.38% target mid-point.

 

CCSTrade
Share This