Lack of Closure Weighs on Sentiment
Overview: Investors angst over trade tensions and Brexit continue remains elevated, and poor Chinese and Japanese economic news played on global growth fears. Equities continue to slog lower. Bond yields are little changed, and the dollar is lower against most of the major currencies. Among emerging market currencies, those in eastern and central Europe are faring best, helped by a euro trading at two-week highs against the greenback. Outside of the US JOLTS report and Canada's housing starts and permits, the North American diary light. The focus is on the fallout from the recent arrest of the CFO of Huawei. The vote on the Withdrawal Bill in the UK House of Commons is slated for tomorrow, and European Court of Justice confirmed the earlier indication that the UK can revoke Article 50 unilaterally.
Asia
China reported November trade and price data over the weekend. The trade surplus swelled to $44.7 bln from $34 bln in October. Both imports and exports slowed, but the former is now up only 3% from a year ago (from nearly 21.5% in October). Exports growth moderated to 5.4% from 15.6%. However, the record trade surplus with the US and faster export growth will not help in negotiations. Exports surged 9.8% year-over-year, while imports slowed 25%. Many press accounts seem to misconstrue one of the factors at work. They write as if Chinese exporters boosted exports to the US to beat the tariffs. It is the importers, which are not typically Chinese companies that are trying to beat the tariff. They are the ones that pay it. This is boosting inventories. Both the trade and inventory distortions will be unwound in Q1 and could have material impact on the economic data.
Separately, softer than expected price pressures China report are consistent with a weakening economy, but there may be other factors at play. Producer prices rose 2.7% from a year ago, down from 3.3% in October, and is the lowest in two years. The main driver looks to be the decline in oil prices. Consumer prices rose 2.2% from a year ago, down from 2.5% and slower than expected. Two-thirds of the slowing can be accounted for the decline in food prices. Food price increases slowed to 2.5% from 3.3%, and this was a function of vegetable price pressures collapsing to 1.5% from 10.1%. Non-food prices fell for the first time since March and maybe energy related.
Both the US and China seem intent so far not to let the enforcement of the US embargo against Iran to upend the fragile trade negotiations, which Lighthizer, who is leading the US negotiating team, emphasized the limited 90-day period to reach an agreement. China cannot simply accept the US actions, but the protests seem modest. The harshest comments seem directed at Canada rather than the US. We suspect the key issue is whether Xi's economic adviser Liu will still l lead a trade delegation to the US this week or next.......MORE
