A Significant Setback in U.S./China Trade Negotiations

May 10, 2019 | Nick Scholte


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The U.S. accuses China of backtracking on its commitments and impose additional tariffs; while injecting significant uncertainty into the economic outlook, most other indicators, particularly employment, remain strong

To my clients:

It was a down week for North American stock markets with the Canadian TSX finishing down 1.2%; the U.S. Dow Jones Index down 2.1%; and the U.S. S&P 500 down 2.2%.

As I’m sure nearly all clients will be aware, the market impacting news this week was the imposition of additional tariffs against Chinese imports into the United States as of 12:01 this morning. The tariff rate on $200 billion in goods was increased from 10% to 25%. China has vowed to respond in kind. In the lead-up to this week’s developments, most indications were that the negotiations were going well and that a trade deal might be imminent. But that narrative has been challenged by reports that the Chinese are backtracking on several previous commitments (although I would caution that this is the U.S. spin of events… who knows for certain was is precisely happening behind closed doors?). Regardless of whether the Chinese are backtracking, or the U.S. is implementing these tariffs as a final squeeze to extract more from the negotiations (with the truth likely being a bit of both), such last moment hiccups are not uncommon when deals are being struck. I’d suggest that this week’s market declines reflect a view that this is not a final nail in the coffin of a trade deal, but rather a step in an ongoing process. The fact that market finished up slightly for the day (not the week however) might lend some credence to this perspective. In fact, Treasury Secretary, Steven Mnuchkin, characterized the latest round of trade negotiations which ended today after the imposition of tariffs as “constructive”. Overall, despite a more volatile up and down week than normal, I’d characterize the net result was a down week at the high end of the “normal” range. Of course the situation should be watched closely, but I think it would be premature to react defensively in portfolios at this juncture.

The prior statement is reinforced by a pair of strong employment releases. Last Friday, at 263,000 new jobs, the U.S. Employment Report came in significantly ahead of expectations for a print of 181,000. In addition, the U.S. unemployment rate dropped to a 50-year low at 3.6%. Meanwhile, in Canada, the economy added 106,500 new jobs in April, which sets an all-time high for this metric. As I’ve often noted, the monthly Canadian report tends to be very volatile, almost to the point of being meaningless as an forecasting tool. For myself, the multi-month trend is a much more important indicator. Hereto the Canadian data has been shining so far this year, with more jobs created in the first 4 months than in all of 2013, or 2014, or 2015, or 2016, or 2018. Just 2017 is missing from that string of years. The point being that the economy (the U.S. particularly, but increasingly likely Canada as well) is doing well and recession certainly isn’t “imminent”. It may yet prove to be the case that recession isn’t as far away as I suspect either, but that’s why we’ll continue to watch both the data and how the trade negotiations play out.

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager
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