Phase one fazes no one

Posted by: Paul Donovan

15 Jan 2020
  • The US and China are set to sign the Phase 1 trade deal. The main benefit is the sign that trade tensions between the US and China are unlikely to worsen in the coming months. Market expectations for a Phase 2 deal are low.
  • Three things do not change. First, supply chains involving China have shifted. Over half the Chinese products subject to September 2018 tariffs have had a noticeable drop in US market share. Supply chains are unlikely to shift back. Second, trade will stay a political issue. As French porcelain napkin ring manufacturers know, trade taxes remain a policy US President Trump wants to use.
  • Third, there is unlikely to be a dramatic revival in investment. US President Trump's trade taxes did most damage to by creating uncertainty that stopped investment. This deal is not enough to create certainty. Investment may rise as companies maintain what they have, but big investment spending seems unlikely.
  • The data due today is on inflation. Eurozone final consumer price data will be ignored. UK consumer and producer prices will be looked to for signals on the Bank of England. US producer prices signal corporate pricing power and where trade taxes may be squeezing profits most.

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