The G20 meetings in Osaka have produced a moderate de-escalation of trade tensions between the United States and China. While precise details remain limited, the headlines are:
- Trade talks are restarting between the United States and China.
- Further tariffs on Chinese goods are being postponed.
- Existing tariffs on Chinese goods will remain.
- The United States will soften current restrictions on U.S. suppliers of Huawei.
The culmination of these headlines appears to be slightly, but not dramatically, better than expectations, although the absence of details or a negotiations timeline has done little to mute the risk-on market reaction.¹ Broadly speaking, these outcomes are consistent with our current market views and we expect the broad trade-weighted U.S. dollar to remain rangebound.
Our macro takeaways from the G20 U.S.-China trade talks
The U.S. consumer should remain mostly insulated from trade tensions. U.S. imports from China currently being tariffed are low in consumer content. Had tariffs been applied on the remaining US$300 billion of goods, however, consumer prices would likely have been more broadly affected. We had been concerned that this, in turn, would’ve weighed heavily on consumer confidence, one of the few bright spots in the U.S. economy. For now, this sector should remain resilient (barring job losses) and our concerns are allayed.
A de-escalation of trade tensions should support the recently plummeting U.S., Chinese, and global business confidence surveys, but we note the outlook is still extremely foggy and exposed companies are still likely to be operating at reduced capacity.² This is particularly true given the G20 meetings provided no negotiations timeline and limited details. Hopefully, more positive headlines will contribute to knock-on improvement in hiring and business investment. It’s too late to see the impact in June data, and perhaps even July figures, but we’ll be watching for proof that the G20 de-escalation was sufficient enough to support the real economy, even at the margin. Likely, the U.S. Federal Reserve (Fed) will be watching for the same evidence.
U.S. growth will avoid a worst-case scenario outcome. Our GDP forecasts continue to point to below potential and weak growth in 2020, but the postponement of further tariffs removes our worst fears for GDP figures. The United States is still in a significant slowdown but, based on current information, the economy isn’t heading toward a technical recession.
While we believe the Fed will still cut rates by a total of 50 basis points (bps) before year end, we don’t expect a full 50bps at its July 31 meeting; even a 25bps cut is no sure thing should July present a material improvement in U.S. economic data. In our view, the Fed is responding to the cyclical slowdown in U.S. growth, which has been exacerbated by the weight of uncertainty on business activity, particularly spending and hiring. That damage is done and suggests monetary policy is too tight in this environment.
Global trade volumes might be bottoming, which is adding to our conviction on emerging-markets (EM) and European risk assets. However, better sentiment with respect to U.S.-China trade should only help this trend and the ease of restrictions on U.S. suppliers to Huawei bodes well for EM tech stocks in particular.
Somewhat tangentially, we’re still expecting near-term easing from China in an effort to stabilize interbank rates, bolster inflation, and support growth which appears wobbly.³ Like the Fed, the People’s Bank of China will need to respond to the damage already created in the economy from uncertainty.
The G20 meetings suggest a moderate de-escalation of trade tensions between the United States and China and markets have reacted positively. However, we continue to stress that tariff negotiations are separate from the broader theme of a U.S.-China economic decoupling that will likely persist, regardless of political leadership in the United States. Trade tensions have kick-started the trend toward dual supply chains, shifting production facilities, higher world average tariffs, and a general theme of de-globalization. This is an important paradigm shift relative to the last 90 years of globalization. It’s also a negative productivity shock and suggests lower long-term potential growth (for everyone).
1 Bloomberg, as of July 1, 2019. 2 Business Confidence Index, Organisation for Economic Co-operation and Development, as of May 31, 2019. 3 Private survey of China’s factory activity in June shows lowest reading since January, CNBC, June 30, 2019.
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