President Donald Trump hailed phase one of a trade agreement, but concedes it may fall over before anything is signed. (AP: Gerald Herbert)
“It’s a lovefest,” US president Donald Trump exclaimed as his negotiators and their Chinese counterparts agreed to the first phase of a deal to end the 18-month-long trade war.
- US markets jumped on news of a US-China trade, but slipped back down on the detail
- The “phase one” agreement is limited to agriculture, currency and intellectual property, well short of the comprehensive deal the US is seeking
- It is expected to take 5 weeks to sign a deal, and while President Trump says it should be completed, he conceded it could still fall apart
A partial deal is a significant step up from no deal, and a prodigious leap from the talks collapsing in acrimony.
The verbal deal covers agriculture and currency and goes a little way to addressing the thorny issue of protecting intellectual property rights.
It also suspends, rather than eliminates, the next round of tariff hikes, which have been postponed once before and were due to kick in on Tuesday.
US equity markets leapt into the lovefest with gusto and a buying binge, before noticing a worrying appendage in the mix.
The agreement still needed to be signed. It might take another five weeks to find a pen and the paper and get the registry office organised for the solemn vows to be exchanged.
Chinese delegation leader, Vice-Premier Liu He, had a more sober view of the “lovefest”.
“We have made substantial progress in many fields. We are happy about it. We’ll continue to make efforts,” Mr Liu offered.
Bilateral love can be fickle
While the President expressed confidence the deal in its current form could be transferred to paper, he acknowledged it could all still fall apart in coming weeks.
Cynics may suggest it’s not the first time Mr Trump has fallen head-over-heels in love on the global stage, only to see the relationship become somewhat fraught down the track.
Not so long ago Mr Trump was gushing about how he and North Korean leader Kim Jong-un “fell in love” over the “beautiful” letters” they exchanged.
Fast forward to last weekend’s low-profile assignation between North Korean and US delegates in Sweden — it ended very badly.
“It has conceived nothing even after the passage of 99 days since the Panmunjom summit, it is not likely at all that it can produce a proposal commensurate to the expectations of the DPRK,” North Korea’s Foreign Ministry posted in a huff on its website.
“We have no intention to hold such sickening negotiations,” the ministry’s wordsmith continued in disgust at the DPRK’s treatment.
So there Mr President, you know what you can do with your beautiful letters.
Showing that love affairs can be a mercurial thing, the US State department said they were “good discussions” and looked forward to pencilling more dates in coming months.
Trade threats linger
Meanwhile, back at the US-China lovefest, it could be noted it is still something of a “shotgun” wedding.
While the October tariff hike has been put back in the holster, the December tariffs — targeting consumer goods such as laptops, mobile phones, computer games, some clothes and auto parts — are still a threat that hasn’t.
The partial, still unsigned, deal is also well short of the comprehensive agreement covering trade, industrial policies and intellectual property rights Mr Trump has always demanded.
For the time being the existing tariffs between the US and China on around $1 trillion worth of goods are still very much in force.
“I’m unsure that calling what was announced by President Trump an agreement is justified,” Scott Kennedy, a Washington-based China trade expert at Center for Strategic and International Studies, told Reuters.
“If they couldn’t agree on a text, that must mean they’re not done. Wishing an agreement does not one make. This isn’t a skinny deal. It’s an invisible one.”
Markets are buying it, for now
US markets having jumped almost 2 per cent on the initial news eased back to a 1 per cent gain, recalling that positive rhetoric on trade has not always translated into positive action.
“We have been here before, where we have seen positive talk,” JP Morgan Asset Management strategist Mike Bell said.
“It’s possible they will be able to do a smaller deal around tariffs, where there is some room for movement.”
In a sense, Friday’s 2 per cent spurt on European markets was similar. The Brexit talks were positive sentiment-wise, but delivered nothing concrete.
European traders may have also overlooked the US is poised to hit EU aircraft makers and farmers with World Trade Organisation-approved tariffs later this week, or maybe they are also expecting a last-minute “lovefest’ reprieve as well.
Nonetheless, risk was back in fashion. The ASX futures market points to a solid start to the week.
Even the much talked about recession predictor, the inverted yield, “uninverted” for the first time since mid-July as positive “hard” US economic data continued to undermine the weaker messages from “soft” data surveys.
Markets on Friday’s close:
- ASX SPI 200 futures +0.5pc at 6,615; ASX 200 (Friday’s close) +0.9pc at 6,607
- AUD: 67.9 US cents; 61.5 euro cents; 53.7 British pence; 73.7 Japanese yen; $NZ1.07
- US: Dow Jones +1.2pc at 26,817; S&P500 +1.1pc at 2,971; NASDAQ +1.3pc at 8,057
- Europe: FTSE +0.8pc at 7,247; DAX +2.9pc at 12,512; EuroStoxx50 +2.2pc at 3,570
- Commodities: Brent oil +2.7pc at $US60.68/barrel; Gold -0.3pc at $US1,489/ounce; Iron ore $US91.50/tonne
As an aside, China’s trade data released on Monday may well underline why a comprehensive US-China deal signed quickly is of the utmost importance to Australia’s export-oriented economy.
Both Chinese imports and exports are forecast to have fallen sharply in September.
In turn, that is likely to show not only that domestic demand in China is cooling even more rapidly that expected, but the demand for Australian resources is drying up as well.
Chinese economic growth is already at a multi-decade low. Third-quarter GDP to be released on Friday is expected to step down again, perhaps to just 6 per cent, a number the National Bureau of Statistics has never before churned out.
Is the surplus in trouble?
It’s early days in the Federal Government’s financial year, but its core promise to return the budget to a surplus is starting to get a bit of a wobble.
It went within $700 million of delivering a surplus a year early and a 2019-2020 surplus has been taken as a given.
However, the monthly budget data through July and August, released on Friday, showed things were tracking around $700 million below where it was expected to be when the budget was released back in April.
As UBS economist George Tharenou pointed out, the rolling 12-month sum up to August for the underlying cash balance (UCB) — the number the government and markets focus on — was a $12.1 billion deficit; while the fiscal balance was a smaller $6.9 billion deficit.
“More accurately, allowing for seasonality and policy impacts, the government stated the budget is tracking … slightly worse than expected by $0.7 billion on the key UCB, and $1.9 billion worse on a fiscal balance,” Mr Tharenou said.
“This contrasts the much better than expected ‘starting point’ … a material $3.5 billion better than expected.”
The good news for the government is a lot of this is due to a 31 per cent jump in tax refunds compared to the same period last year — tracking about $1 billion ahead of schedule. In other words, payments already budgeted for, but distributed early.
The bad news is, as Mr Tharenou points out, all that extra tax refund cash hasn’t translated into retail sales — it looks like having been saved, just what Treasurer Josh Frydenberg didn’t want.
“Indeed, the [roughly] unchanged year-on-year pace of retail sales at 2.5 per cent from May to August implies that all of the additional tax refunds were saved or used to repay debt, at least so far,” Mr Tharenou said
“We still expect a jump of retail sales in coming months, but the lack of any pick-up so far supports our view that more stimulus is needed, and the RBA will cut rates 25 basis points in November.”
With the government holding firm on the need for a surplus, and further risks to the surplus on downside, through such things as rising unemployment payments, rather than the upside with the iron ore price blasting off again, the chances of a federal cash splash seem more remote than ever.
Jobs again the focus
The September jobs figures (Thursday) will be the key local economic news of the week.
Job creation is still expected to be a strong 20,000 over the month and the unemployment rate should stay at 5.3 per cent after ticking up again in August.
The swing factor will be people looking for work. People giving up looking for work will lower the participation rate and could drive unemployment down. A higher participation rate could deliver an ugly number.
In business circles there are some big AGMs for investors to check out.
The CBA (Wednesday) generally doesn’t give much in the way of guidance, but may address the impact of falling interest rates on margins and may well be asked about rising misconduct remediation costs across the sector.
Telstra (Tuesday) as usual will have one big question from the floor: “How sustainable is our dividend?”
The Bank of Queensland is the first batter up in the banks’ mini-reporting season. It may not be a stellar result, with the cash profit expected to be well down on last year.
Overseas, things are busier.
There’s a deluge of important data from China, while Britain and the EU have one last chance to hammer out a Brexit deal and the US opens up a new front in its various trade skirmishes, hitting European aircraft and farmers with a fresh batch of WTO approved tariffs.
|RBA minutes||More detail on this month’s board meeting where rates were cut to a record low of 0.75pc|
|RBA speech||Deputy governor Guy Debelle talks at an investment conference in Sydney|
|Spending intentions||Sep: CBA survey, may provide insights into whether the tax refund & rate cuts are gaining traction. The Westpac survey suggests they’re not|
|Leading index||Sep: Westpac series, has been pointing to a slowing economy in coming months|
|AGMs||CBA, CSL, Treasury Wine Estates|
|Employment/unemployment||Sep: Jobs growth likely to remain solid, around 20K over the month, unemployment to hold at 5.3pc|
|Bank of Queensland FY result||$350 million cash profit forecast, down around 10pc on last year|
|RBA speech||RBA governor Philip Lowe speaks at the IMF in Washington|
|CH: Trade balance||Sep: Both imports and exports are expected to contract, which isn’t great news from an Australian point of view|
|CH: Inflation||Sep: Consumer inflation may be cooling after pork spike, factory (producer) prices remain weak|
|JP: Industrial production||Aug:: Japanese factory output has been in reverse, likely to be another bad month|
|US: Retail sales||Sep: US consumers have been doing their bit for the economy|
|US: Industrial production||Sep: Manufacturing survey points to slowing output|
|EU: Brexit summit||Last chance to hammer out a deal before UK parliament votes on a deal/no deal Brexit on October 19|
|CH: GDP &monthly data release||Q3: GDP likely to have ticked down again to 6.1pc. Monthly retail sales, industrial production and infrastructure spending steady|
|EU: US tariffs imposed||Backed by the WTO, the US is set to impose a 10pc tariff on large aircraft and 25pc on a variety of European farm produce|
|EU: Brexit summit||Day two of the summit|