What phase one trade deal may mean

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President Trump’s New Year’s Eve announcement that he will sign a phase one trade deal with China will offer some stability to those hurt most by the trade war and should allow the Federal Reserve to keep monetary policy accommodative, according to analysts.

“The signing of phase one of the trade deal is not a panacea nor the end of the trade war,” noted Scott Colbert, executive vice president and chief economist at Commerce Trust Co. “It does however mark the first step in providing some stability to the business community most affected by the tariffs and, of course, provides a boost to the agricultural sector that has borne the brunt of the Chinese retaliation to our imposition of tariffs in the first place.”

In addition to offering “a positive backdrop” to the economic outlook, Commerce Bank noted it “pushes the unlikely probability of a recession even lower.”
The major benefit is “a more stable operating environment for businesses in general that were impacted by the tariffs affording them more certainty and lifts the outlook for investment opportunities,” Colbert continued. “And perhaps most importantly, it reduces friction and likely tempers whatever modest inflationary pressures that were building affording the Federal Reserve the ability to maintain a very accommodative monetary position.”

The deal will be a confidence builder, said Edward Moya, senior market analyst, New York at OANDA. “The manufacturing sector will get a small boost with this deal, mainly because businesses will feel more confident we will not see a complete collapse in trade talks between the world's two largest economies.”

While farmers will get the biggest boost, the deal provides “a general risk-on mood that will benefit the manufacturing sector.” Despite that, don’t expect business investment to soar, since “President Trump will always hold the threat of fresh tariffs,” against all trading partners, so some uncertainty “will likely forever live,” Moya said.

Despite a push for a second phase deal, “Wall Street is skeptical anything additional deals will get done before the presidential election in November,” he added and the “contentious issues have little to no chance getting resolved this year. China will not concede changes to their economic models and rewrite their longer term goals to address the heart of the U.S.-China trade war issues.”

Since the phase one agreement was announced earlier in December, “the market impact should be mostly discounted at this point,” said Gary Pzegeo, head of fixed income at CIBC Private Wealth Management. “It will be important to watch the survey data out of the ISM [Friday], but it may be too early to discern a shift in sentiment and therefore hiring plans in the manufacturing sector.”

Indeed, recent manufacturing surveys showed the sector remains weak.

The Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook Survey signaled expansion in December after contraction in November. “Company outlooks improved modestly and uncertainty abated somewhat,” according to Emily Kerr, Dallas Fed senior business economist. “Manufacturers were bullish in their 2020 expectations, with a majority anticipating business next year to be stronger than what they experienced in 2019.”

The Marquette-ISM Milwaukee Report on Manufacturing showed contraction, although at a slower pace than the previous two months. Respondents suggested tariffs and “uncertainty regarding international trade agreements are the biggest concern.”

The Federal Reserve Bank of Chicago’s Midwest Economy Index continued to show below-trend growth.

The Texas service sector expanded more rapidly in December, according to the Texas Service Sector Outlook Survey, which showed revenues hit a five-month high.

Jobless claims
Initial jobless claims fell to a seasonally adjusted 222,000 in the week ended Dec. 28 from 224,000 the week before. Continued claims rose to 1.728 million in the week ended Dec. 21 from 1.723 million a week earlier.

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Economic indicators Monetary policy Jobless claims Manufacturing industry Federal Reserve Bank of Chicago Federal Reserve Bank of Dallas