|AUTHOR: Jason J. Roque, CFP®, APMA®
TITLE: Investment Adviser Rep – CCO
TAGS: Trade, FRB, Brexit, ECB
Christmas came early for the economy last week as progress was made in trade and central bank policy. What should this mean for markets?
US/China Trade… maybe
A tentative trade deal was agreed to late last week. The deal involves agricultural purchasing and intellectual property concessions in exchange for a roll back of some tariffs. To be specific, products that currently have a 15% tariff will be reduced to 7.5% and products with a 25% tariff will remain as is. This progress should help global growth projections improve for 2020. This would be a stark difference to the consistent reductions since the start of 2018.
Federal Reserve Bank (FRB) Decision
The FRB left rates unchanged in December and made indication that they should remain this way for a while. This may mean that interest rates are entering neutral territory. Neutral rates are a place where FRB activity is neither accommodative nor tightening. They also signaled that fiscal efforts are needed to help monetary attempts. This would allow wages to be a better reflection of potential future inflation.
The Conservative party dominated the election on December 12th. This should mean that Brexit will happen on January 31st. Unfortunately, that is not the last we will hear of Brexit. January 31st will kick off an 11-month trade negotiation. This means that for 2020 it is business as usual. Prime Minister Johnson has vowed to no further extensions. Given the UK’s history in trade negotiations an extension will likely be necessary to complete a deal. This just sets the table for turmoil late in 2020.
EU Structural reform… maybe
Christine Lagarde in her first press conference called for structural reform to the EU. Ideally creating a better system by which to support monetary policy. Since the financial crisis, the European Central Bank has, for the most part, had to act alone to stimulate growth.
Advancements in trade, FRB, Brexit, and a changing of the guard at the ECB contributed to late week data. It was mostly priced in, but renewed optimism should help foster a Santa Claus rally into year-end. Next year suddenly has reduced headwinds, which should provide a favorable back drop for growth in the early part of the year.
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