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"The hard work begins now" says the fantastically-named Mr Brilliant

December 3, 2018

 

ref :- "US and China face hurdles after tariff truce" , The Financial Times, International Section

 

To the uninitiated, Myron Brilliant might sound like the name of some 1970s glam-rock star, or maybe a WWE wrestler. Those who keep their ear to the ground (like all of us, of course) recognise him as the US Chamber of Commerce's head of international affairs, and he is not to be confused with the UK's equivalent, Simon Simply-Gorgeous (well .... not strictly true). Anyway, Mr Brilliant welcomed the postponement of the imposition of further tariffs agreed between the US and China and the commitment to further talks aimed at finding a more substantive resolution.

 

Fair enough .... but Mr Brilliant was also well aware that there's a very long and difficult path to be negotiated before a happy outcome is likely.  Unsurprisingly, the news coming out of the G20 conference was greeted with enthusiasm by investors but the suggestion in the FT and elsewhere is that it might be wise not to assume too much when assessing whether the weekend's development will prove to be the turning of a corner in the trade dispute.

 

In the meantime, the very idea of a resolution has seen a generally weaker dollar today, although Brexit considerations continue to put UK sterling under the cosh and the Turkish Lira has been marked lower after weaker-than-expected inflation data. Better prospects for China have particularly boosted both the Chinese Yaun / Renmimbi (USD/CNY from 6.96 into 6.8850) and emerging markets who would benefit from Chinese growth. A settlement of the trade dispute would, of course, be seen as a boost to global growth not just China's, and that's pushed bond yields a touch higher (US 10yr back above 3.00%). Stock markets are much stronger across the board.

 

The reaction is understandable .... even a couple of days before the conference the mood-music between the US and China was less-than-exclusively amicable and a positive outcome was certainly not guaranteed. Nevertheless, a bit of caution would seem sensible. There's a different spin being put on the deal by Beijing and Washington. The Chinese are putting forward the prospect of tariffs being scrapped in their entirety, which is a huge leap from the mere temporary suspension of a hike in tariffs from 10% to 25%. For their part, the Americans have made no mention of the possible elimination of tariffs. Beijing omitted to include the 90-day deadline for negotiations in its communiques, and the idea that tariffs could then be reimposed or even increased.

 

China has "committed"  to purchases of US goods that would help to address the current imbalance in trade but so far has not been overly specific about the details; and perhaps most tellingly, there has been little obvious progress in the two most thorny issues, the ownership and access to technology and intellectual property.

 

So whilst it does seem that we are in a better place than we were a week ago, it will be worth remembering that so far the good news is just noise .... and in the past that hasn't counted for a lot.

 

 

ref :- "Fed eyes murkier messaging after next rate rise" , The Financial Times , International Section

 

Just quickly, we would recommend you to dip into this piece in the FT. As we were saying last week, the Fed and its Chairman Jay Powell look to have adjusted their idea of how high rates will have to go .... or put another way, where the neutral rate of interest that neither stimulates nor constrains the economy will be.

 

The accepted (but certainly not universal) wisdom now is that after a widely-expected hike later this month we will see just one more rate rise in 2019. When the neutral rate is reached, it will affect Fed policy in more ways than one. As the economy has been growing, the Fed has been on a course of gradually raising rates from ultra-low levels. It has been a relatively simple affair for the Fed to communicate to investors what its intentions have been via its policy of "Forward Guidance". But if it's true that faced with "tepid" inflation and growing global risks we are approaching the neutral interest rate, from that point on it will no longer be able to hold investors hands by informing them of future policy.

 

No longer will the Fed be able to guide investors by reference to its plan of gradual rate rises ahead, and we may even see the worth of the dot-plot projections of future levels of interest rates come into question. The Fed will have to become reactive to conditions, or in other words, Fed decisions on monetary policy will become dependent on the economic data (don't get us started on "data-dependent" again !).

 

Without that level of forwarding guidance, it would seem that things are likely to get a bit more difficult for investors ..... and nobody's saying that it's exactly easy right now.

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