China, U.S. reach trade deal. Will a global growth rebound follow?

On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Research Analyst Puneet Thiara discussed the new China-U.S. trade agreement, key findings from the strategist team’s recently released 2020 Global Market Outlook and impacts of the UK general election.

Phase one trade deal reached between U.S. and China

The U.S. struck a phase one trade deal with China on Dec. 13, Ng said, scrapping plans to place tariffs on another $156 billion of Chinese imports. The deal also cuts in half the U.S. tariff rate on approximately $120 billion of additional Chinese goods, she added. In exchange, China will remove some tariffs on U.S. imports, purchase additional U.S. agricultural products and reform some of its current intellectual property practices, Ng noted.

“This easing in trade tensions is great news for global markets and the economy,” Ng stated, adding that the phase one deal marks a material de-escalation in the trade spat. The deal may unlock a global growth rebound, she said, yielding a mini-cycle recovery that could prove favorable for globally exposed assets like emerging markets or European equities.

Fed indicates rate hikes unlikely in 2020

Thiara asked Ng what impacts the China-U.S. trade deal could have on monetary policy, now that a rebound in global growth appears more likely. Ng stated her agreement with the 2020 Global Market Outlook, which noted that one of the main risks to growth was potential central-bank tightening, particularly if global uncertainty were to ease and inflation pressures were to build.

“It’s important to note that neither of these risks have materialized, and probably won’t for awhile,” Ng said, pointing to the U.S. Federal Reserve (the Fed)’s recent policy meeting, where the central bank indicated that monetary policy is likely to remain unchanged in 2020.

“The Federal Open Market Committee’s dot plot from the Dec. 10-11 meeting showed that 13 of the 17 committee members foresaw no rate increases next year,” she explained. In addition, Fed Chair Jerome Powell signaled in the ensuing press conference that the hurdle for hiking rates is very, very high, Ng noted, as inflation continues to run below the central bank’s 2% target.

Ng projects that the core PCE (personal consumption expenditures) price index—the Fed’s preferred measure of inflation—will dip from 1.6% to 1.5%, year-over-year, when November’s data is released. “This would mean inflation is moving even further away from the Fed’s target,” she said, stressing that inflation pressures are essentially muted.

Brexit uncertainty lessens as Johnson, Conservative Party win big

UK Prime Minister Boris Johnson’s Conservative Party notched a decisive victory in the country’s general election on Dec. 12, Ng said. With Conservatives securing a large majority of the seats in Parliament, Johnson is now less dependent on the far-right Eurosceptics in his own party when it comes to passing deals, Ng explained. “The Conservative Party’s victory reduces Brexit uncertainty, and is also beneficial for the British pound, the UK economy and UK-exposed assets,” Ng stated.

Moving forward, the main source of uncertainty will center around how Johnson negotiates a trade deal with the EU, Ng said. “The prime minister now has the power to pass policies fairly quickly, which means he might be more aggressive when it comes to EU negotiations,” she concluded.

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