I think the War of the Roses is an appropriate analogy for the burgeoning
U.S.-Chinese trade war. While many presume the U.S. will win this war, I
believe there will be no real winner: Everybody loses in a trade war in an
era of globalization, and it seems we are already seeing this war take its
toll on both sides:
In early January, disappointing Chinese data were released: Manufacturing
PMI for December clocked in below the critical 50 level, indicating
contraction.1 However, before anyone assumes China has lost the
trade war and is ready to capitulate, please read President Xi Jinping’s
New Year’s speech. The speech doesn’t sound like it’s being given by the
leader of a defeated nation. Xi recognizes the challenges ahead, but he
promises that China will remain steadfast in its pursuits, and also pledges
more stimulus in reductions to taxes and fees.
We are seeing many forms of stimulus in China as the Chinese government is
pulling out all the stops in an effort to counter the negative effects of
the trade conflict: The People’s Bank of China (PBOC) announced last
Wednesday that it would provide support to Chinese small businesses by
changing its rules in order to encourage more lending to these entities.
And on Jan. 4, the PBOC helped ease lending conditions by cutting reserve
requirement ratios for banks. Not surprisingly, services data remain
stronger than manufacturing data in China, indicating that domestic
stimulus is holding up that end of the economy. But it’s clear China is
feeling some pain.
The U.S. is feeling some pain too. Apple recently provided an ominous
warning on earnings: It said iPhone sales were down and attributed it in
part to lower Chinese demand brought on by the trade war and the downward
pressure it has placed on the Chinese economy. What’s more, Kevin Hassett,
the Chairman of the U.S. Council of Economic Advisers, stated publicly that
he believes Apple is just the beginning, that many other U.S. companies
will also face similar headwinds as a result of the U.S.-Chinese trade war
and its impact on Chinese demand.
The Trump Administration said that Apple’s announcement is a sign that the
U.S. is winning the trade war. But I don’t see how the U.S. can declare
victory if U.S. companies’ earnings are being negatively impacted. American
farmers are also feeling significant pain. They continue to be hurt by the
trade war as China purchases soybeans and other food elsewhere, even though
they have been receiving some aid from the U.S. government and even though
China agreed in December to purchase some soybeans from the U.S. The
farmers’ situation is likely to worsen in the future given the
Trans-Pacific Partnership (TPP) is moving forward without the U.S. Because
the U.S. opted out, its goods will be less competitive to 11 nations in the
TPP, including Japan and Canada, because tariffs were slashed among the
TPP’s member nations. That means a real loss in terms of market access for
American agricultural products.
Strong U.S. jobs report, but what comes next?
Having said all that, we have to recognize that the U.S. economy is still
doing very well. Underscoring this point was the strong December jobs
report, which defied expectations – not only did nonfarm payrolls rise by
more than 300,000 but wage growth was also significant at 0.4% month over
But I must stress that the payrolls number is a coincident indicator – it
illustrates the current state of the economy rather than indicating future
growth – while the unemployment rate is a lagging indicator; it’s the
economic equivalent to looking in the rear-view mirror. Leading indicators
such as the ISM Manufacturing Index are showing weakness, which clocked in
well below consensus expectations last week. The December ISM Manufacturing
Report includes some instructive comments from respondents:
* “Growth appears to have stopped. Resources still focused on re-sourcing
for U.S. tariff mitigation out of China.” (computer and electronic products
* “Customer demand continues to decrease (due to) concerns about the
economy and tariffs.” (transportation equipment industry).
* “Starting to see more and more inflationary increases for raw materials.
Also, suppliers (are) forcing price increases due to tariffs.” (food,
beverage and tobacco products industry).
* “Tariffs continue to impact business direction and profit.”
(miscellaneous manufacturing industry).
* “The ongoing open issues with tariffs between the U.S. and China are
causing longer-term concerns about costs and sourcing strategies for our
manufacturing operations. We were anticipating more clarity (regarding)
tariffs at the end of 2018.” (machinery industry).
I must also note that, unfortunately, this jobs report does not help the
cause of the many market participants who would like the U.S. Federal
Reserve (Fed) to hold rates steady this year – particularly the wage growth
number. It certainly makes the Fed’s role more complicated. Consider the
confusion around the economic picture – the dramatic stock market drop over
the past few months has caused some market participants to believe a
recession is coming (this has happened in the past, but not in all cases).
There is some validity to these concerns, as U.S. gross domestic product
growth estimates for 2019 have been downwardly revised. And that, by the
way, is the collateral damage of a trade war. It’s not just the U.S. and
China – I believe the overall global economy will be damaged by such
conflict. Reflecting concerns about the economic picture, Fed funds futures
currently indicate that the market expects zero Fed rate hikes in 2019.
Fears were running so high earlier in the month that I received questions
about whether I expected the Fed to actually cut rates in 2019. It seemed
like the sky was falling as the new year began. The yen, commonly viewed as
a safe haven, was rallying dramatically (although there were admittedly
other reasons for the dramatic currency move). And then sentiment changed
during the week. Not only did the price of crude oil rally, but we got that
strong U.S. jobs report.
So where are we today? The global economy remains solid but is slowing –
and runs the risk of greater deceleration if the trade wars escalate and/or
Fed policy is too tight. Those two risks remain very real. However, I am
optimistic that the Fed will be data dependent, which at this juncture
likely means one or two rate hikes. Recent comments from Fed Chair Jay
Powell suggest the Fed could hit the “pause button” for rate hikes at some
point next year. On Jan. 4, Powell took a reassuring stance, stressing
flexibility and explaining, “We’re always prepared to shift the stance of
policy and to shift it significantly if necessary.” I will reiterate that I
do not believe the Fed will cut rates this year unless the economic
situation changes dramatically. The key takeaway is that this is a very
fluid situation – today’s leading indicators are tomorrow’s coincident
indicators, and we must hope the Fed is very holistic in the data it
reviews to make its decisions.
U.S.-China trade talks
And so, as the U.S.-China trade talks got underway last week, I’ll be
hoping for the best but preparing for the worst in terms of negotiations.
As I’ve said before, there are few reasons to believe China is willing to
make any major concessions. China’s recent actions to stimulate the
economy, both monetary and fiscal, suggest to me that it is preparing for
an extended fight. As Xi’s speech laid out, China will continue its efforts
to institute reform and open up its markets – but that will clearly be on
China’s timetable and will follow China’s preferences. And China has the
ability to play a long game, which the U.S. does not; Xi is president for
life, while President Donald Trump is preparing for a reelection bid in
less than two years that will likely ultimately hinge on the state of the
U.S. economy. This suggests to me that the U.S. will ultimately have to
capitulate; the question is how long it will take and how much damage will
be done first.
To me, success will be the U.S. accepting small concessions from China and
ending the trade war soon; that is my best-case scenario in this modern-day
War of the Roses. The good news is that, if this were to happen soon, much
of the economic damage could be reversed relatively quickly, and markets,
which seem to have priced in a significant trade war, would likely rebound
dramatically, in my view.
Happy anniversary to the euro
I would be remiss if I didn’t mention that the euro celebrated its 20 th anniversary on Jan. 1. Conceived many years ago, this common
currency did not come to fruition until 1999. The euro has had its
challenges over the years – not the least of which is that it is the
currency of a monetary union that does not have a corresponding truly
fiscal union. However, to paraphrase Mark Twain, reports of its demise have
been greatly exaggerated.
I do expect continued challenges for the eurozone and the European Union in
2019: Eurozone Purchasing Managers’ Index data remains disappointing,
political disruption appears on the rise, and there is uncertainty over who
will replace “Magic” Mario Draghi at the helm of the European Central Bank.
However, even as more Europeans reject their traditional political parties
in favor of more populist parties, they overwhelmingly support the euro. In
an October 2018 European Commission poll, 74% of respondents across the
eurozone said they believed the euro was good for the European Union – the
highest level since the annual survey began in 2002.
is Global Market Strategist at Invesco. This article first appeared in
the Invesco blog.
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1 Source: Chinese National Bureau of Statistics, as of December 31, 2018
2 Source: U.S. Bureau of Labor Statistics, as of January 4, 2019
Purchasing Managers Indexes are based on monthly surveys of companies
worldwide, and gauge business conditions within the manufacturing and
The ISM Manufacturing Index, which is based on Institute of Supply
Management surveys of more than 300 manufacturing firms, monitors
employment, production inventories, new orders and supplier deliveries.
Fed funds futures are financial contracts that represent the market’s
opinion of where the federal funds rate will be at a specified point in the
future. The federal funds rate is the rate at which banks lend balances to
each other overnight.
The Eurozone Manufacturing PMI® (Purchasing Managers’ Index®) is produced
by IHS Markit based on original survey data collected from a representative
panel of around 3,000 manufacturing firms. National data are included for
Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of
Ireland and Greece.
Safe havens are investments that are expected to hold or increase their
value in volatile markets.
The opinions referenced above are those of Kristina Hooper as of Jan. 7,
2018. These comments should not be construed as recommendations, but as an
illustration of broader themes. Forward-looking statements are not
guarantees of future results. They involve risks, uncertainties and
assumptions; there can be no assurance that actual results will not differ
materially from expectations.
© 2019 by Invesco Canada Ltd. Reprinted with permission.