President Trump delays the implementation of increased tariffs (scheduled for March 1st), indicating optimism for a resolution to the trade tensions with China
Progress οn the US-China trade negotiations, as well dovish central banks, continue to support investor sentiment, more-than-offsetting weak economic data and negative earnings revisions, thus lifting equity valuations. Indeed, equity market valuations have increased by 12% since the market’s bottom in late December, with the 12-month forward P/E ratio currently at 14.4x vs a 30-year average of 15.7x and a peak of 15.1x in late-August.
In the past week, global equities recorded fresh gains, with the MSCI ACWI up by +1.2% wow (11% ytd). US and China are said to have agreed on six important negotiation issues including inter alia the prevention of forced technology transfer, intellectual property rights and non-tariff barriers to trade.
Acknowledging the “substantial progress” on negotiations, President Trump announced the delay to the scheduled tariffs increase (initially due on March 1), without setting a new deadline for the talks to conclude. Equity markets recorded further gains on Monday, with the CSI300 in China up by 6% and MSCI Asia ex. Japan by 1%. However, the enforcement mechanism of the potential deal remains a thorny issue for policymakers, with the US seeking a stronger mechanism to ensure commitments will be upheld.
In view of the slowdown in global growth (affecting both the US and China), any further escalation in trade disputes should be avoided. The (global) consumer remains resilient (albeit slowing), as does the services sector. However, industrial production has weakened and manufacturing business confidence has eased recently. A resolution of trade tensions should benefit the manufacturing sector and boost business investment.
The FOMC minutes from the January 29-30 meeting were slightly dovish, suggesting that “almost all” policymakers favored a late 2019 end to the balance sheet normalization process (Total Assets: $3.98tn). Recall that currently the Fed does not reinvest up to $50bn/month from the proceeds of maturing securities (USTs: $30bn | MBSs: $20bn). The UST 10Yr yield was broadly stable (-1 bp) at 2.65%, albeit the USD declined by 0.6% wow in NEER terms.
With the Fed adopting a more dovish stance in early 2019 (by being patient on interest rates and more eager to conclude the balance sheet normalization earlier than expected), it appears that officials aim to prevent long-term inflation expectations from falling further. As a result, the Fed may become more tolerant on allowing actual inflation to rise above the target of 2%, with senior officials (Clarida, Williams) recently arguing in favor of such a strategy.
In the euro area, consumer confidence rose to a 3-month high in February (+0.5 pts mom to -7.4) above consensus estimates, supported by resilient private consumption and labor market conditions. In contrast, business surveys were mixed, with the improvement in services largely offset by a weaker manufacturing sector, which entered contraction territory for the first time since mid-2013. Overall, the composite PMI index rose slightly by 0.4 pts to 51.4 (consensus: 51.1), indicating that the moderate growth of H2:18 will likely continue in Q1:19 (around 0.6% qoq annualized).