The House passed the US-Mexico-Canada (USMCA) trade deal which is expected to pass the Senate at the start of 2020. It’s a positive development that trading partners are coming together rather than apart, but the economic impact leaves much unchanged from the prior NAFTA agreement. This comes on the heels of a “Phase One” trade deal with China, which is yet to be signed, although both sides are still publicly declaring a coming deal with China continuing to add to the exemption list on US products.
These breakthroughs come amid a flurry of other legislation that could easily spiral into disruptive scenarios. Last week, the House voted on party lines to pass two articles of impeachment against Trump. Trump also signed into law a large defense bill, which sanctions Turkey and Russia, among other things. On impeachment, the vote is a partisan symbol of protest (no single House Republican voted to impeach) and Democrats would need 67 votes to convict in the Senate (against a Republican majority of 53). So far, it has made a Trump re-election more likely. The odds of a Trump re-election on September 25 (the day after the impeachment inquiry was launched) sat at 43%; those same odds now sit at 50%. For better or worse, economic and trade policies for the past three years are getting more and more likely to extend into the next five years rather than one.
The defense bill could generate countersanctions by Turkey and Russia against the US. It has also generated more animosity with countries such as Germany and China. The Russian sanctions target a pipeline that would transport oil to Germany, which relies heavily on Russian energy; the sanctions may impact their access to energy. This comes a few weeks after Trump proposed tariffs on French products in retaliation for a 3% tax on digital revenues. The European Union (EU) is the largest exporter to the US after China, so a trade war with the EU could have lasting impact, and both sides have plenty of reasons for one. In addition, the bill adds tension to talks with China, who alleges it is “distorting and smearing” issues relating to Taiwan, Hong Kong, and prohibited Chinese products, and denounce it for creating the US Space Force to weaponize space.
Overall, equity markets marched on to another positive week. Commodities have seen a steady climb so far this month with oil exceeding $60/barrel. The S&P 500 year-to-date tops 31% despite the growing rhetoric of slowing growth and fears of recession. The impact of the trade wars put a noticeable dent into emerging market returns which lag all other major equity indices year-to-date, although that return is still above 16%.
PMI composite showed modest growth for both manufacturing and services. Huge gains in housing starts and permits in November echoed the strong sentiment in the housing market index for December. Industrial production rebounded after a 2-month hit. The JOLTS report also bounced back with a strong increase in job openings for October. The Fed business outlook survey fell flat for December but consumer sentiment held steady.
This week will feature releases on durable goods orders, new home sales, and jobless claims.
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