As much as things change, they also stay the same. 12 months ago the dominant issues in global financial markets were the trade war between China and the United States, what the United States Federal Reserve was going to do next after having lifted interest rates, and whether a Brexit deal could be done before the departure date of 29th March 2019.
Fast forward 12 months later, and we are still observing the trade war, we are closely monitoring the U.S. Federal Reserve and Brexit remains unresolved.
What Next for the Fed?
There has been much conjecture in 2019 about the best path for the United States Federal Reserve (Fed) to follow with their monetary policy. One thing for certain however is that the Fed have been very transparent about their own views and plan.
In their last two-day policy meeting for 2019, the Fed’s Federal Open Market Committee kept interest rates steady, as widely expected. Unlike many previous meetings, the decision to keep rates unchanged was unanimous, and after three straight interest rate cuts this this year, the central bank kept the funds rate in a target range of 1.5%-1.75%.
More importantly, the Fed indicated that no action is likely in 2020 while there is persistently low inflation. While Fed officials will obviously continue to monitor conditions and economic data, the central bank stated that monetary policy is likely to stay where it is for an unspecified time.
“The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective,” the statement from its last meeting said. “The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate,” the committee added.
Fed Chairman Jerome Powell has previously described the three interest rate cuts in 2019 as “insurance” against a global economic slowdown and the ongoing China – United States trade war. Fed Vice Chair Richard Clarida has also suggested last month that full employment, which is the lowest rate that the Fed thinks the jobless rate can go before it starts escalating inflation, could be as low as 3.6%. The current unemployment rate is just 3.5%, the lowest in 50 years.
However, inflation remains below the Fed’s 2% target level, and the Fed remains committed to meeting its 2% inflation goal. In a November speech Mr. Powell acknowledged that the declines in such estimates were among the arguments for the rate cuts in 2019. “They provided another reason why a somewhat lower setting of our policy interest rate might be appropriate,” he said. At his last news conference, Mr. Powell said, “We would need to see a really significant move up in inflation that’s persistent before we would consider raising rates.”
After cutting rates for the third time straight in October, Fed officials generally agreed that they won’t be moving rates any time soon, unless economic conditions change significantly, according to the minutes. "Most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market and inflation near the committee's symmetric 2% objective," the Fed said in the minutes. Many agree that after three consecutive rate reductions, the mid-cycle adjustment is over.
The markets widely believe however that the Fed will cut at least once in 2020, however some believe it could be as many as three cuts for the year.
To start the new year, United States President Donald Trump tweeted, “I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!”
According to U.S. Treasury Secretary Steven Mnuchin, the phase one trade agreement reached in December between China and the United States will boost global growth.
In doing so, the world’s two largest economies have hopefully de-escalated a simmering trade war. Under the agreement, China said it would buy more U.S. agricultural products, while the United States agreed to cancel some new tariffs and reduce rates for other duties. It also includes changes related to technology and intellectual property.
“This deals with intellectual property, this deals with technology transfer, it deals with structural agricultural issues, financial services are opening up, currency understandings, as well as a commitment to purchase U.S. agriculture and U.S. goods,” Mr. Mnuchin said in a CNBC interview.
“For a very long period of time the U.S. was open to China, China was not open to the U.S. There were very strong restrictions and for the first and second largest economy in the world, there should be more trading back and forth and that’s what we’ve been working on, and I think these agreements will not only be good for the U.S., but will be very good for global growth,” he added.
Earlier in December the Institute for Supply Management said that manufacturing activity in the U.S. continued to contract last month, easing to 48.1 in November, which was well below the estimate of 49.4. There has been for some lingering uncertainty of when either country will sign a trade deal, and this wasn’t helped either when President Trump signed legislation supporting protesters in Hong Kong. Trump said the bill signing “doesn’t make it better.”
Mixed Bag in Asia
There are some signs that Asia’s fortunes could turn around in 2020. The ongoing trade war between China and the United States has weighted heavily and the impact will now hopefully dissipate. Many Asian economies have supply chains that are linked to China and are heavily dependent on trade. However, a lot of the negativity from the U.S. - China trade war has already been priced in by markets.
While China was always in the headlines in Asia, it was a close neighbor who was also having a significant impact in the region.
For the second half of 2019, Hong Kong has been paralysed by ongoing protests, which began in June over proposed legislation that could have allowed HK residents to be extradited to China where they could face possible torture and unfair trials. The legislation was quickly withdrawn, however the protests continued over broader issues like the growing gap between the city’s ruling class and those merely getting by amid soaring housing costs, as well a shortage of decent-paying jobs.
Rather than the protests dissipating over time, the opposite has happened with growing numbers and a global audience watching on. Many of those joining in on the protests are generally concerned about an erosion of HK’s civil liberties it was promised after being handed back over to Chinese rule in 1997.
As we head into 2020, there appears to be no end to the now months-long pro-democracy movement with further violence between police and demonstrators expected.
Significantly, businesses identified with mainland China have been frequent targets of determined protesters.
The city is considered a major financial centre in Asia however the ongoing protests are having a significant impact on its reputation.
As an indication of how serious the demonstrations have become, police are now routinely using water cannons, tear gas and pepper spray to disperse demonstrators. A government statement supporting these measures said officers were “deploying the minimum necessary force.” “To safeguard the rule of law and public peace, the police will enforce the law strictly,” the statement said.
What does 2020 hold then?
In her New Year’s address, Hong Kong leader Carrie Lam said the months of protests had brought “sadness, anxiety, disappointment and even rage.” She promised to tackle underlying economic and social problems this year.
Ms. Lam said she would “listen humbly” to help bring an end to the protests but also reinforced the importance of the “one country, two systems” framework under which China rules Hong Kong.
Deal or No Deal?
In what seems like a long time ago, Brexit (the United Kingdom leaving the European Union (EU)) was originally due to happen on 29th March 2019, after a referendum was held in 2016.
In 2019, the negotiations and multiple failures to reach a deal with the European Union took a casualty as the then Prime Minister Theresa May resigned after her position was deemed untenable.
The main sticking point for many Conservative MPs was the Irish backstop, which was designed to ensure there would be no border posts or barriers between Northern Ireland and the Republic of Ireland after Brexit.
Mr. Boris Johnson took over as Prime Minister in July 2019, after winning the Conservative leadership contest, and he began renegotiating Ms. May's deal. He was successful in replacing the backstop with new customs arrangements.
In early December, British voters headed to the polls yet again for the third time in four years, which resulted in a comfortable victory Prime Minister Boris Johnson’s Conservative Party.
The United Kingdom is now due to leave the European Union (EU) on 31st January 2020, after Prime Minister Boris Johnson's Brexit deal was passed by MPs, assuming it is also approved by the European Union.
If it is, the United Kingdom will enter a transition period until 31st December 2020, and during this time the UK and EU will negotiate a free trade deal, as the UK's trading relationship with the EU will remain the same.
The Bank of England (BOE) has stated that it will be closely watching how the result of the election impacts sentiment and the economy. It is accepted that if there is a Brexit deal done by the 31st January, the central bank will keep rates at 0.75% for the time being.
Optimistically perhaps, U.K Finance Minister Sajid Javid told BBC radio that there was not “a single doubt in my mind” that an “ambitious, deep, comprehensive, free-trade agreement” could be agreed with the EU after Brexit within months.
At its final meeting for the year, the central bank held its main interest rate steady at 0.75%, voting 7-2 in favour of keeping the current level. The BOE maintained its dovish stance with its accompanying statement: “If global growth fails to stabilize or Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected U.K. recovery.”
The central bank also revised its 4th quarter UK GDP forecast down to 0.1%. “Household consumption has continued to grow steadily, but business investment and export orders have remained weak. Financial markets have remained sensitive to domestic policy developments,” the BOE said in a statement.
Addressing the ongoing China – United States trade war, the central bank said the “partial de-escalation of the U.S. – China trade war gives some additional support to the outlook”. The BOE has also been tackling the uncertainty of Brexit for some time now.
BOE Governor Mark Carney will be departing the central bank at the end of January after more than seven years in the role.
Weighing in on Brexit, the BOE delivered their own assessment, saying that Britain risks suffering an even bigger hit to its economy than during the global financial crisis 10 years ago, if it leaves the European Union in a worst-case Brexit scenario.
The BOE published an assessment of different scenarios related to the U.K.'s withdrawal agreement from the EU and made the claim that a "disorderly" exit from the European Union would plunge the U.K. economy into that position. In the "disorderly" scenario, the U.K. "loses existing trade arrangements that it currently has with non-EU countries through membership of the EU."
To provide another perspective, around two months ago recently retired former speaker John Bercow says leaving the EU is the United Kingdom's 'biggest blunder since World War II'.
In his most recent job of managing the Parliament's lower chamber, he had to remain neutral however he has now come out and said that Brexit will leave Britain weakened diplomatically and economically.
At a dinner in London, Mr. Bercow was quoted as saying, “I don’t think it helps the UK. Brexit is the biggest mistake of this country after the war. I respect prime minister Johnson, but Brexit doesn’t help us. It’s better to be part of the [EU] power bloc.”
To compliment those comments, he said in another interview, "We're in a world of power blocs and of trade blocs, and it makes more sense for the UK to be part of that power bloc called the European Union and part of that trade bloc called the European Union."He said, "if you add to that the civilizing effect of some of the social legislation that has been ushered in by the European Union, that seems to be to amount to a virtuous combination of benefits for the UK."
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