Equities rebounded last week after initial worries subsided over the coronavirus outbreak. Now there are 910 confirmed deaths, surpassing that of SARS and MERS. The novel coronavirus outbreak also has infected more people with at least 40,573 confirmed cases. The epicenter of the outbreak was mainland China, and given its prominence for emerging market economies, those equities have taken the biggest hit. Oil dropped over 16% from the beginning of the year on concerns of slowing demand due to the outbreak, ending the week at $50.95. The risk-off environment also pushed the 10-year Treasury yield lower to 1.59% and further compressed an already compressed yield curve.
China so far is following through on the Phase One trade deal commitments, cutting tariffs in half on $75 billion of US goods. Another constructive sign is the public acknowledgement in Chinese state-sponsored media of the Phase One trade deal and openness for a Phase Two. Neither side has announced details regarding timeline much less the number of phases, and there are still several gaping and contentious issues to address on both sides. The US wants China to address its unfair trading practices and intellectual property theft. China wants the US to address high tariffs that remain on the bulk of its exports and US constraints on expanding Chinese technologies – 5G network participation and mobile phone manufacturer Huawei.
Almost two years ago the Trump administration began its crusade against the “unfair trading practices” of China. Xi and his negotiators appeared content to draw out negotiations, perhaps waiting for a change of administration after the 2020 election. The landscape favored such a view on April 2, 2018 when China announced its first wave of counter-tariffs. At that time, betting odds placed a 32% chance on Trump leaving office before his first term expired (impeachment, for example), and betting odds for a 2020 Trump re-election topped out at a 40% for 2018, reaching a low of 29% by the end of the same year. As we continue through 2020, Trump’s re-election chances now sit at 60% and China faces economic headwinds from the coronavirus that imperils its 5-Year plan. Both sides have shown a recalcitrant attitude to compromise and a Phase Two deal addressing even more contentious issues has every expectation of being a long, drawn out process.
Motor vehicle sales and the PMI manufacturing index both met consensus estimates. The ISM manufacturing index improved for January after six months of weaker-than-expected results. Construction spending missed for December, contracting 0.2% month-over-month. However, the ADP employment report almost doubled payroll expectations and employers added 225,000 jobs for January, both in a nod to strong labor markets.
This week will feature speeches from Fed chair Powell and releases on CPI, retail sales, and consumer sentiment.
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