Negotiations and US-China trade still moving along
A delay in the signing of Phase One of the US-China trade deal doesn’t mean it won’t happen
9 November 2019 | Shane Oliver, AMP Capital Markets Chief Economist
A delay in the signing of a Phase One US/China trade deal into December is not a big deal, particularly given reports of a possible roll back in tariffs and as long as progress continues in negotiations which seems to be the case.
Pressure on US President Trump to get a win on this front continues to build going into the presidential election year as he needs to keep the economy growing and unemployment from rising and he needs distractions from the impeachment mess. In terms of the latter its looking worse for Trump with more testimony to the effect that Trump tied US aid to Ukraine to the Ukraine probing Joe Biden.
While this is making it likely that the Democrat controlled House of Representatives will vote for impeachment, it’s doubtful that 20 Senators will vote to remove him from office (which will be needed to reach the 67 Senate votes required) as long as support for impeachment from registered Republicans remains low. And so far, opinion polls put that at just 11%.
The Presidential Tweet Poll
If President Trump’s tweets are any guide to his stress level then it looks to be still going up, after posting his biggest ever tweet numbers in September, in October he posted a new record 1018 tweets or nearly 33 a day!
Investment markets and key developments over the past week
The past week saw most share markets push higher on the back of positive news regarding US/China trade talks, benign economic data and some optimism that global growth will pick up.
Chinese exports and imports were a bit better than expected but are still down on a year ago. In dollar terms, exports fell 0.9% while imports fell 6.4% from a year ago in October. The trade balance for October was US$42.81 billion, the market forecasts were of $40.83 billion.
US shares rose 0.8% to a new record high, Eurozone shares gained 1.9%, Japanese shares rose 2.4%, Chinese shares rose 0.5% and Australian shares gained 0.8%. Bond yields rose sharply on more positive expectations for global growth. Oil and metal prices rose too, but gold fell on falling safe haven demand and the iron price slid further on rising production by Vale. The $A fell as the $US rose.
RBA lowers forecasts not rates
The RBA left interest rates on hold as expected following its November meeting but we remain of the view that the RBA is likely to have to act on its preparedness to ease monetary policy further in order to get to “full employment and the achievement of the inflation target over time.”
Yet again the RBA revised down its growth forecast for this year to 2.25% – a year ago it was forecasting 3.25%! In fact, this downgrade is in line with the average downgrade seen to its growth forecasts since 2012.
So, on the RBA’s own – relatively upbeat – forecasts the economy will remain far away from full employment and the inflation target for the foreseeable future. Against this backdrop its hard to see it not having to act on its easing bias…unless we see significant fiscal stimulus soon.
I don’t buy the argument that rate cuts are making things worse, but the case for more fiscal stimulus is getting louder and louder. The historical experience shows that its quite normal for consumer confidence to fall during the initial phase of a rate cutting cycle. This is because both are reacting to the same bad news on the economy and because monetary easing only boosts growth after a lag. So, the current experience of falling rates and confidence is not unusual.
Australian Treasurer, Josh Frydenberg’s decision to make no changes to the RBA’s inflation target and its interpretation makes sense. To lower the inflation target to 1-3% as some were arguing for would have blown its credibility, pushed the $A up sharply and boosted the risk of deflation and falling wages which is the last thing we want given high household debt levels. Making the target stricter – by requiring say a Bank of England style letter each time the target is breached – could force the RBA to become inflation nutters. So thankfully it remains unchanged.
A big trade surplus for Australia
But at least another big trade surplus for September reminds us that it’s not all negative for the Australian economy. Net exports are likely to provide a small boost to September quarter GDP growth and the trade surplus points to an even bigger current account surplus in the September quarter of around 1.4% of GDP after the June quarter surplus of 1.2% which was the first since 1975.
Lower iron ore prices as Vale production returns will be a drag going forward but the current account surplus also reflects strong export volumes (which should remain strong if we are right and global growth picks up), strong services exports and going forward an improving net income balance as offshore assets of super funds continue to build.