U.S./China sign phase-one agreement

January 21, 2020 Chatham Financial

Prior week summary

U.S. equities continued their move higher to start the year setting new all-time highs as the signing of the phase-one U.S./China trade deal and the Senate’s passing of the United States-Mexico-Canada Agreement (USMCA) worked to improve investor sentiment. The U.S. and China signed the long-awaited phase-one trade deal on Wednesday. The agreement outlines a series of reforms the Chinese government will make related to forced technology transfer, intellectual property theft, and currency manipulation. Additionally, China has agreed to purchase $200 billion of U.S. goods through December 31, 2021, including $32 billion in agriculture goods and $77.7 billion in manufactured goods. In exchange, the U.S. kept the commitment made in December to halve existing 15% tariffs on $120 billion of Chinese goods and to leave $160 billion of goods, threatened with tariffs in mid-December, untaxed. Speaking during the signing ceremony, President Trump praised the deal saying, “This is a very important and remarkable occasion. Together we are righting the wrongs of the past,” while President Xi said in a letter that the deal is, “good for China, the U.S., and the whole world.” In other trade news, the Senate passed the USMCA on Thursday after it passed through the House of Representatives in December.

Last week brought a deluge of U.S. economic data and the results were largely mixed. Industrial production figures contracted 0.3% in December, below expectations, but the Empire State Manufacturing Index and the Philadelphia Fed Business Outlook each posted readings far surpassing analyst estimates, fueling the hope that the pickup in the regional manufacturing surveys will begin to show up in the broader ISM Manufacturing Index which has been in contractionary territory for five consecutive months. Inflationary pressures also proved to remain muted as demonstrated by the lackluster readings in both the Consumer Price Index and Producer Price Index last week. While CPI has risen 2.3% year over year, the Fed’s preferred inflation gauge, the core PCE Deflator, remains at 1.6% through November, well below the Fed’s 2% target. Last week also saw a number of Federal Reserve officials hold speaking engagements. Kansas City Fed President Esther George indicated that she was content with where the target range stood saying, “Keeping rates on hold for now is appropriate in my view as we assess the economy’s response to last year’s rate cuts and monitor incoming data,” but also noted, “It could be the case that downside risks and uncertainties persist in a way that keeps investment spending weak and spills over to the consumer, altering the modal outlook and requiring further policy easing.”

The look forward

Market participants will have little to monitor in the way of economic data this week as the releases for the week are very light with existing home sales, the Leading Indicator, and the Markit services and manufacturing PMI topping the bill. The World Economic Forum kicks off in Davos, Switzerland on Tuesday.

Rates snapshot


Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial



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