Big Week Ahead — China Trade Talks; Powell on GDP; White House Infrastructure Meeting
Author: Greg Valliere
April 29, 2019
THE MOST CRUCIAL STORY for markets in this new week is whether U.S-China trade talks will move toward a conclusion. Treasury Secretary Steve Mnuchin and a high-level U.S. delegation are in China this week, amid signs that there’s still more work to do on an enforcement mechanism and China’s subsidies to its state-owned companies.
WE NEVER THOUGHT THERE WOULD BE A DEAL before May, so a final snag or two isn’t surprising. We think Mnuchin will make some progress, laying the groundwork for a final round of talks when the Chinese return to Washington on May 8. A signing ceremony is likely by Memorial Day, with good news and bad news. The good news: a long, nasty trade war will be avoided; the bad news: we’re not sure the final pact will contain genuine structural reforms by China.
TRADE UNCERTAINTY — ESPECIALLY WITH CANADA AND MEXICO — remains one of the few dark clouds in the Goldilocks U.S. economic scenario; approval of the NAFTA replacement deal has stalled in Congress. But that won’t be enough to derail what looks like an accelerating U.S. economy.
ALL EYES ON JAY POWELL: The Fed Chairman will meet the press on Wednesday, after the FOMC meeting concludes. We suspect he will sound slightly more bullish on the economy, but he always has been upbeat; there’s no recession in sight. Persistently low inflation is the bigger concern, a major reason why the Fed can stay on the sidelines for months to come, with no rate hike until winter or later. As for a rate cut, Powell may hint that’s not coming.
WE GOT PUSHBACK from some readers who disagreed with our upbeat take on Friday’s GDP report. Obviously the high level of inventories will have to be worked off, but the first quarter ended with strong signs of life from consumers. Growth in the second quarter probably won’t top the 3.2% first quarter level, but the monetary and fiscal stimulus in the pipeline is extraordinary, and 2-1/2% GDP growth this year still looks like a low bar to clear.
TRUMP, PELOSI AND SCHUMER TOMORROW: What could possibly go wrong when these three meet? Plenty, but that won’t stop them from sitting down on Tuesday at the White House to discuss an infrastructure bill. Trump has been hinting that he wants a $2 trillion bill, and the Democrats will gladly comply if a deal can be struck on their terms — labor protection, sensitivity to climate change, etc.
THE BIG ISSUE, OF COURSE, IS HOW TO PAY for an infrastructure bill; the Democrats want to raise the top corporate tax rate, but that’s not going to happen. Trump wants private sector funding, which could be part of a final bill. Our odds: 30% chance of passage this year, but bitter partisanship makes any kind of deal unlikely (the Mueller report will stay in the headlines for months to come).
THERE’S ONE AREA OF AGREEMENT: Spending more money, a theme everyone in Washington seems happy to embrace. Stimulus is the new mantra, here and abroad, as politicians seem to be warming up to red ink; call it Keynesianism or the Modern Monetary Theory, whatever — interest rates are so low that running higher budget deficits is all the rage.
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