What’s more important: A trade deal or rate cuts?
Author: Kevin McCreadie
September 18, 2019
There are two things that investors want more than anything these days: A satisfactory resolution to the United States and China trade dispute and further rate cuts from the U.S. Federal Reserve.
But they face a dilemma. By getting a trade deal, for instance, there’s a very good chance that the Fed stops cutting rates, especially if prospects for the global economy begin to improve from having the former in place. In fact, expectations of further cuts have already begun to wane now that the U.S. and China are back at the table and prospects of an agreement have brightened.
In the same vein, one of the main reasons why the Fed might continue lowering its key lending rate in the weeks to come is if trade talks hit another standstill, or worse, go completely off the rails, jeopardizing an ultimate agreement and ushering in an even greater threat of recession.
In other words, when it comes to these two outcomes, investors may not have their cake and eat it too and should be prepared for just one or the other to be fulfilled but not both.
This, of course, begs the question, “which is more preferable—a trade deal or more rate cuts?”
Clearly, the former would be beneficial to markets, which have been whipsawed repeatedly from the acrimonious negotiations between the world’s two biggest economies over the past year and a half. This would be especially true if striking a deal meant an end to the hundreds of billions of dollars in tit-for tat tariffs enacted over this time and which are now threatening to take a more serious bite out of global growth.
Less clear, however, is the impact that lower rates would have on markets and the economy. While more cuts might soothe investors who have grown anxious about the prospect of equities continuing their bull run without more stimulus, there is also the very real possibility that lowering U.S. rates to zero or into negative territory, may do more harm than good in an economic environment which is already awash in over US$17-trillion dollar in negative rate debt, according to Bloomberg data. After all, banks make money collecting interest on the money they lend, not by paying others to borrow it.
None of this is to say that a trade deal is inevitable and, therefore, rate cuts unnecessary. If anything, the U.S. and China remain miles apart on reaching an agreement and it could take several more months for them to bridge the gap. But given the choice, investors would be better off getting the former, than they would be getting the latter.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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