The U.S. and China backed away from escalating a trade war on Saturday at the G-20 meeting, a plus for near-term market sentiment. President Trump said the United States would hold off on new tariffs on $300 billion of Chinese goods. He also said U.S. technology companies could start selling equipment again to Huawei, China’s largest telecom company. Stalled trade talks are expected to restart.
No Deal, but a Sigh of Relief
The ceasefire did not produce a deal, but should remove immediate concerns. Currency markets responded positively to the announcement, for example, in the hours following the announcement and global stocks rallied. What will ultimately be more interesting is whether the down trend in global business confidence and capital spending is broken and starts to improve from here.
Over the past year or so, global growth slowed as trade tensions mounted and business capital spending stalled. Across the world, manufacturing also began to suffer (chart, below). Europe’s manufacturing purchasing managers index (PMI) began to slide in early 2018, with the United States and China PMIs following suit starting in late 2018. Manufacturing is important because it provides important clues about turning points in the economy. While still reasonably healthy, domestic manufacturing trends are headed the wrong way, potentially confirming the bond market’s recent recessionary signals. This week we should get additional global manufacturing data for June, which we expect to be weak, but it will not reflect the most recent trade developments at the G-20.
Economics is Political
Ultimately, the strength of the global economy and the outlook for monetary policy hinge on how the United States – China trade dispute plays out. As the world’s two largest economies, the stakes are large. So, too, are political stakes here at home. As we head into the 2020 election cycle, the health of the economy and trade policy will both be pivotal issues. Members of both the Democrat and Republican parties were quick to criticize President Trump for appearing to back away from implementing harsher measures. There are members of both parties that see political points can be gained by being “tough” on China.
We will have to wait and see whether this weekend’s détente leads to a lasting deal. A positive outcome might be that economic and political conditions here and in China lead to a constructive set of negotiations which leads to compromise and a deal. A negative outcome would be a relapse into hostility and stalemate which would unnerve markets. Given the drag from already enacted tariffs, and the negative momentum in global growth, we expect a rate cut by the Federal Reserve in July. If conditions worsen, perhaps as the result of another breakdown in trade negotiations, further rate cuts would likely be called for.
The sudden escalation of tensions in May between the United States, China and Mexico, or the collapse of a prior trade truce last fall, will likely give skeptics plenty of reason to hesitate. In our view, this weekend’s surprise de-escalation of trade tensions should provide a respite, but not a solution, to lingering and complex trade issues.
Stay tuned… More to come…
Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Steve Lerit, CFA, Client Portfolio Manager
Suzanne Ashley, Analyst
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