25 November to 1 December: A strong US economy steams ahead

The latest release of GDP statistics in the US confirmed that the world’s largest economy was able to sustain a pace broadly matching its trend-growth in 3Q19, as the annualised rate of real GDP growth hit 2.1%. The print proves bearish investors wrong, whose long-standing view had envisioned the US slipping into a recession in 2019-2020 (implied by the shape of the Treasury curve months ago, incorrectly so far). It was no surprise that household spending was one of the key drivers of economic activity. However, the fact that business investment activity was stronger than estimated by most (although there is still room for improvement) shows that the US’ economy is more resilient to external headwinds (such as the trade tensions) than what the broad market implied a couple of months ago. Looking forward, household spending will remain the backbone of GDP growth in the US, in our opinion. Based on the currently available macroeconomic data, we believe that the US will be able to grow around 2% in 2020, as the jobs market remains hot and monetary policy is very likely to remain supportive. Whether the actual GDP growth number will be over or under 2% at the end of 2020 will depend on how the US-China trade negotiations progress and if world trade volumes recover.

18 to 24 November: Is the largest trade deal in history really very close?

Although the economic diary was relatively light on relevant data releases, headlines related to the renewed strains between the US and China left investors scratching their heads. During the week, President Trump claimed that Washington and Beijing were very close to make the largest trade deal in history. However, the POTUS added that he stood with Hong Kong protesters. The US Senate passed a bill that requires certification of Hong Kong autonomy and warned China against suppressing protestors violently. The US backing of Hong Kong demonstrators fuelled Chinese anger and officials called upon the US to stop interfering with internal Chinese affairs. Although, US President Trump tried to verbally dissect the two issues, as if they were independent of each other, we believe that Chinese officials could become more reluctant to sign the so-called Phase One trade deal soon if the POTUS signs the bill supporting Hong Kong protesters into law.

These renewed strains come after news that the US and China were in final negotiations over how much tariffs should be rolled back. Since we may or may not receive new relevant pieces of information related to the trade negotiations this week, macroeconomic data releases could return to the focus.

11 to 17 November: US officials sound optimistic on a Phase One trade deal

Top US and Chinese trade negotiators had a ‘constructive call’ on Saturday. It is welcome news that headlines have turned more positive after a week of setbacks. Although US Treasury Secretary Mnuchin, US Secretary of Commerce Ross and US Presidential Advisor Kudlow made reassuring statements that there was a ‘very high probability’ of a deal, their Chinese counterparts remained quiet. It remains uncertain whether the two parties will eventually sign anything by the end of the year, and even if they do so, further frictions may persist. For the time being, markets seem to be pricing in a swift interim Phase One trade agreement between the world’s two largest economies.

This week the global economic diary remains fairly light on relevant economic data releases. Markets will be focussing on two key things: the release of the FOMC minutes on Wednesday and any piece of news related to the trade talks.

4 to 10 November: The road to hell is paved with good intentions

The market continues to focus on the trade negotiations between the US and China. For a very short period of time last week, it looked like the two parties could reach a deal soon, which encompasses the removal of tariffs. This optimistic idea, however, was short-lived, as US President Trump downplayed it on Friday. In our interpretation, the glass remains half full, as trade tensions have potentially peaked and a ‘Phase One’ interim trade deal remains in the pipeline, which could be signed as early as the end of 2019. However, the path to reach such an outcome will very likely be volatile.

28 October to 3 November: Unambiguously positive macro data in the US

The strength of the US economy shined through the latest set of macro data releases, surprising investors positively. The 3Q19 real GDP growth print was – in our view – significantly stronger than the median market estimate. The latest report showed that the US economy expanded 1.9% in annualised terms. Pessimists would argue that the growth story has only two legs, i.e. strong domestic demand and a supportive Fed, whilst the story is missing its third leg, due to the loss of momentum in manufacturing activity, which is further amplified by the trade tensions between the US and China. We, however, see the glass half full, since the US’s economy is largely domestically focussed, and the labour market remains hot (proven by the stronger-than-expected jobs report on Friday).

Eyes turn to the front of the trade negotiations between the US and China, again. The APEC Summit in Chile has been cancelled due to civil unrest. There was optimism in the market that Presidents Trump and XI would use that meeting to sign an interim ‘Phase One’ deal. Although signing an agreement lacks a venue right now, it does not necessarily mean that a deal will not get signed – especially if there is a credible commitment by both parties. President Trump has already signalled that he is happy to sign the deal wherever. Now, the ball is in the Chinese administration’s court.

21 to 27 October: Deal or no deal, that is the question

Although the number of economic data releases was limited during the week, we received very important pieces of information regarding the US-China trade negotiations, which contributed to the improvement of global market sentiment. According to the Chinese administration, parts of the text for the first phase of a trade deal with the US are ‘basically completed.’ The US Treasury made a similar statement. Presidents Trump and Xi Jinping aim to seal the phase one trade deal in Chile in November.

This week, both the economic diary and the policy agenda are very busy with potentially market-moving releases and announcements. The 4^th plenum of the Chinese Communist Party Congress Convention will take place this week. This will be an important meeting to set the stage for economic reform agenda for the next few years, in our opinion. In the US, the Federal Reserve will most likely reduce the Fed funds rate again, by 25bp after which Chair Powell will talk to the markets to provide guidance. In terms of the economic diary, both the US and China will reveal their respective manufacturing PMI indices. In addition, we will have a chance to assess the first reading the of US’ 3Q19 GDP data as well as the October jobs report.

14 to 20 October: Never a dull moment

Although the number of relevant macroeconomic data releases was limited, the week was busy with policy announcements and political developments. First and foremost, the trade saga continued during the week as the US and China made ‘substantial progress’ for a ‘phase one’ agreement, according to Chinese Vice Premier Liu He. Should the talks remain on track, there is a chance to sign an interim deal in mid-November. Second, the impeachment inquiry against the POTUS remained in the limelight. As the inquiry progresses, the degree of uncertainty increases in terms of the US administration’s approach to economic, foreign and trade policies. Third, a vote on Brexit was – unexpectedly – postponed by Parliament. As long as the probability of a hard Brexit remains greater the zero, investor sentiment and economic confidence can remain frail for a prolonged period of time. Only one thing is certain: each of these will be closely scrutinised by investors in the coming weeks, as their impact on economic developments could be meaningful and could amplify the slowdown in global economic activity. Consequently, it will be key to see if central banks and finance ministers take the International Monetary Fund’s advice and undertake measures to mitigate the downside risks to the slowing global economy.

7 to 13 October: A wave of positive news

Markets received some pieces of good news related to the trade negotiations between the US and China at the end of the week. According to US President Trump, the US and China agreed on Friday on the outlines of a partial trade according, which could be signed as early as next month. After a long period of uncertainty, we finally have at least some sort of a solution to the prolonged trade tensions between the two largest economies on the globe. The ‘phase one’ trade deal may be limited in scope and is no fix for the relationship, but it suggests – in our view – that the downside risk to global growth has become may not be as great as market pricing may imply. In addition, the ‘partial deal’ could also be a sign that trade tensions may not escalate any further.

30 September to 6 October: Showdown in DC

A series of macroeconomic data were released in the US during the week, which left the market questioning the duration and the sustainability of the current economic cycle’s pace. The ISM manufacturing index fell below the 50-point threshold for the second month in September signalling that industrial production could contract soon. Although industrial output growth has considerably slowed, an outright decline in volume has not been confirmed by hard data yet. The usual monthly labour market metrics soothed the market jitters to some extent, as the jobs report as a whole indicated that the weakness in the manufacturing sector has not spread to the US consumer yet, which is undoubtedly among the most important drivers of economic growth.

All eyes will be on US-China trade negotiations, scheduled to resume in Washington DC and likely to begin in the middle of this week. The outcome of the talks will most likely affect global investor sentiment. In our view, any positive headline could boost global market sentiment and could also reduce the probability of a policy mistake, which could further hurt global growth.

23 to 29 September: A new set of political risks could keep the market on its toes

Just when the market thought that the risk premia related to political and policy uncertainties (e.g. trade tensions between the US and China, Brexit, etc.) would not widen further to a meaningful degree, a new set of risks entered the equation. News that the Democratic Party in the US is set to start the impeachment process against President Trump and further intensifying economic distress in Germany dented appetite for risk assets. On Friday and during the weekend, rumours surfaced that the White House are (internally) mulling ways to limit US investors’ portfolio flows into China. As the implications of the impeachment and limiting portfolio flows into China are a challenge and a half to estimate, markets globally could remain jittery.