What goes up…

1.  This was supposed to be easy.  Here we go again.  Just when you thought it was a done deal… it isn’t.  Trade negotiators on both the Chinese and US sides came up with a practical strategy to move negotiations forward by agreeing to a phased approach.  This made a lot of sense given the magnitude and breadth of the issues on the table.  Phase One of the strategy was supposed to cover the easy stuff.  I have been reporting that China, in a very practical sense, needs US farm imports that it relies so heavily upon.  Agricultural product prices have been going up in China as a result of supply chain breaks and an outbreak of swine flu.  Keeping food affordable and on the table is crucial for a government to remain strong.  The US, for its part, has exacted stinging tariffs that hurt both China and US.  So a low-hanging-fruit phase would include China’s resumption of farm product purchases and the US halting the impending tariff hikes.  That deal was made and announced over a month ago and has helped markets hit new highs.  The so-called Phase One deal was supposed to grease the skids for a more comprehensive agreement which would include the “real stuff” like intellectual property abuses, bad trade practices, currency manipulation, and… human rights issues, amongst other things.  Seems so simple doesn’t it?  It appears not so simple, based on the negotiations that followed the announcement.  By the time the Chinese delegates got off their flight back to Beijing they were left wondering: “what do we actually get in this deal?”  Within days of the announcement the Chinese made it clear that they would be seeking a roll-back of existing tariffs.  In the US it was all cheers and high-fives for the Administration who hoped that the mere removal of a threatened tariff would yield the “biggest order of US farm products… in history”.  Soon the US made it clear that any removal of existing tariffs would only come after a phase one deal.  Sounds like we have a standoff.  I am pretty sure I used that very term weeks ago.  Still both sides continued to talk to each other… and the press, which seemed good enough for the markets to hit new highs almost daily.  Any pullbacks in response to bad news have been minimal indicating that investors really believe a deal will get done.  Tensions in Hong Kong have always been in the background but finally found their way into the discussion this week when the US Senate passed a bill supporting the Hong Kong protesters.  In addition to support, the bill put in question trade status if things did not improve.  This enraged the Chinese government who threatened retaliation if the bill gets signed.  The bill is expected to be voted upon by the House today and then it will go to President Trump for approval.  Yesterday, reports began to emerge that the phase one deal may not be signed until the new year.  Still, in a speech last night, WHILE YOU SLEPT, Chinese lead negotiator Liu He claimed that he was “cautiously optimistic” about the phase one deal.  One wonders if this low-hanging-fruit phase is so difficult to achieve, how will the two sides ever be able to get through the more difficult issues.  You know, the ones that sparked this whole trade war in the first place.

2.  Not out of the woods yet.  Last month the Federal Reserve announced that it would lower key interest rates by a further -25 basis points for a third time as part of its “mid cycle adjustment”.  The cuts were engineered to slow the economic retreat and turn things around.  Similar moves in the past have worked and the vigilant Fed jumped at the opportunity to pull it off once again.  The easing was certainly welcomed by the stock market which has enjoyed a record busting year in the wake of the Fed’s first hints of the aid.  After last month’s FOMC meeting, Chairman Powell made it clear in his statement that Fed easing would be on hold after the third rate cut.  The good news is that markets were largely expecting the move and responded positively.  At the time, trade negotiations with China seemed to be heading in a positive direction and the bond markets gave their seal of approval bringing yields up and steepening the yield curve.  Stock markets have hit new all time highs indicating that investors are bullish on the future.  Yesterday,  the Fed released the minutes from its FOMC meeting which gives us a little more insight into the discussions that surrounded the move.  What we learned is that there is still a big divide between members.  Some reluctantly voted for the last rate cut while others were adamantly against it, but all agreed that further cuts should be on hold.  We also learned that they all felt that there was still significant risk associated with “international trade tension and foreign economic developments”.  Nothing new here, but it appears that the Fed is still ready to act if necessary.  That necessity could possibly come if a phase one trade deal falls apart.

– The Philadelphia Fed Business Outlook is expected to have increased to 6.0 from 5.6.

– The Conference Board’s Leading Economic Index is expected to have fallen by -0.2% compared to last month’s retreat of -0.1%.

– Existing Home Sales may have rebounded to a +2.0% growth compared to last month’s decline of -2.2%.

– Cleveland Fed President Loretta Mester and Minneapolis Fed President Neel Kashkari will speak today.

– BJ’s Wholesale and Macy’s will announce before the bell.  After the close earnings include Intuit, Nordstrom, Splunk, Ross Stores, Gap, and Williams Sonoma.