The trade war has worried central banks enough to prompt interest rate cuts. However, the effect of this will only be felt later and could coincide with phase one of a US-China trade settlement
With many major central banks around the world either cutting interest rates or adopting a more dovish tone, and with economic uncertainties, deriving from the US-China trade war, affecting the whole world, markets could be forgiven for being somewhat downbeat. However, that might prove a costly mistake. Admittedly, institutions such as the International Monetary Fund and the Organisation for Economic Cooperation and Development have downgraded their global growth estimates for 2019, seeking to factor in the consequences of the trade war.But there is every possibility that some level of agreement between Beijing and Washington on trade issues is now within reach. Prior assumptions about global economic prospects might have to be revisited.
As regards a “phase one” deal, the mood music emanating from both US and Chinese negotiators has been somewhat more upbeat. “We’re pretty comfortable that the phase one is in good shape,” US Commerce Secretary Wilbur Ross told Fox Business Network on November 1.
Rather than inferring from the tone of central bank and IMF pronouncements that the risks to the world economy are on the downside, markets might adopt a more positive attitude.
After all, markets are necessarily more interested in where prices are going rather than where they have been, and if there is some light at the end of the tunnel as regards US-China trade differences, that will give the global economy a material fillip.
More generally, markets could well conclude that, at the present juncture, it might actually suit China to cement some kind of trade deal with the United States.It won’t have gone unnoticed in Beijing that, for six months in succession, a measure of confidence among factory owners in China has come in below the 50 level that marks the dividing line between positive and negative sentiment.
Only last week, new data from China’s National Bureau of Statistics showed the manufacturing purchasing managers’ index at 49.3 in October.
That was below the consensus forecast of analysts polled by Bloomberg for an unchanged reading from September’s 49.8. Some form of trade war settlement would surely improve confidence among Chinese manufacturers.
Yet, in explaining the logic behind last week’s US interest rate cut, Federal Reserve chairman Jerome Powell emphasised that “weakness in global growth and trade developments have weighed on the [US] economy”, while acknowledging that if a “phase one” trade deal is signed off “that would bode well for business confidence and perhaps activity over time”.
Additionally, as Powell stated, “monetary policy operates with a lag”, so the full effects of the Fed’s moves “will be realised over time.”
Consequently, the effects of US monetary policy easing, which itself has been materially shaped by Fed concerns about the trade war, will only become evident in the coming months, just as the first-phase deal has potentially been achieved. Thus, the world economy could end up with a double boost.
Although august institutions such as the IMF and the OECD have cut their global economic forecasts, there is room for a more positive narrative that might prove persuasive to markets. Even a partial trade deal will be beneficial to the global economy.
With that in mind, markets should look beyond the gloom. A more upbeat outlook might prove more profitable.
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