In addition, the US has agreed to a partial rollback of the 15% tariff on a separate $120bn tranche of Chinese goods that commenced on September 1, which falls to 7.5% when the agreement is signed, though the 25% tariff on a larger $250bn list of mainly industrial imports is set to remain unchanged. Meanwhile, according to the USTR, China has agreed to undertake "substantial additional purchases of US goods and services in the coming years". A fact sheet compiled by the USTR (see here) outlined that this commitment is due to see China boost its import of US goods (including agricultural products) over the next 2 years so that the total value exceeds the level from 2017 by at least $200 billion, thus narrowing the US's trade deficit with China. Additionally, concessions have been granted by China relating to intellectual property commitments, forced technology transfers, financial services and foreign exchange devaluations. The final aspect of the phase one agreement is a dispute resolution mechanism, which opens the door for future tariffs or other measures to be implemented in the event of non-compliance.
Over in the UK, PM Boris Johnson secured a resounding victory in Thursday's general election that resulted in the Conservatives gaining an 80-seat majority in the Commons, the largest for the Tories since 1987. With the path now clear for an orderly Brexit to occur on January 31, market attention now turns to the nature of the arrangement the PM will negotiate with the EU during this transitory period, particularly in regards to matters of trade and migration. For its part, EU Council President Charles Michel said that negotiations should be conducted on the basis of "maintaining close co-operation" with the UK. But, for now, after more than 3 years of deep uncertainty, the premise of a stable government should offer much-needed support to a UK economy that has essentially stalled.
The other main focus this week was on the latest policy meetings from the Federal Reserve (Fed) and the European Central Bank (ECB). In the US, the Fed's policy-setting Committee paused their easing cycle leaving its benchmark interest rate unchanged at 1.5-1.75%, as expected. Following a total of 75 basis points of cuts being delivered at their three previous meetings as "insurance" from a weakening global economy and trade uncertainty, Committee Chair Jerome Powell described the current rates setting as "well positioned" to support the constructive outlook conveyed in the updated summary of economic projections, in which its GDP growth forecasts were unchanged from 3 months ago at 2.2% in 2019, 2.0% in 2020, 1.9% in 2021 and 1.8% in 2022. The unemployment rate is now seen a touch lower in 2019 at 3.6% and was then trimmed by 0.2ppt in each of 2020 (3.5%), 2021 (3.6%) and 2022 (3.7%), however in the post-meeting press conference Chair Powell was reluctant to classify the labour market as "tight" given the current pace of wages growth (3.1%Y/Y) and instead described it as "strong". Consistent with that assessment, the inflation outlook remained mostly intact and is not expected to return to the target until 2021. Indicating the Committee is now in wait-and-see mode, Chair Powell outlined that the current monetary policy stance "would likely remain appropriate" unless the data flow was to cause a "material reassessment of our outlook". As such, the revised 'dot plot', which contains individual members' projections for their expected path for rates, implied the Committee would be on hold for an extended period until 2021 where the median forecast was for one rate increase.
The ECB also finds itself in wait-and-see mode after recently implementing a broad-based package of stimulus measures and thus the Governing Council held its policy stance unchanged at this week's meeting. The updated ECB staff macroeconomic projections contained only minor alterations compared with September's forecasts. GDP growth for 2019 was lifted from 1.1% to 1.2% but was trimmed from 1.2% to 1.1% for 2020 before rising to 1.4% in 2021 and 2022. The inflation forecast was left at 1.2% in 2019, then slightly upgraded to 1.1% (from 1.0%) in 2020, while in 2021 it was lowered from 1.5% to 1.4%. New ECB President Christine Lagarde in the post-meeting press conference outlined that while the risks to the growth outlook remained "tilted to the downside" some of the uncertainties that have weighed on activity in the bloc, most notably in the manufacturing sector, relating to trade and geopolitical tensions had become "somewhat less pronounced". Though the data flow was still regarded as weak overall, it was noted that there had been "some stabilisation in the slowdown of economic growth in the euro area".
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Turning to the domestic perspective, the latest consumer and business surveys were in line with last week's subdued update on the Australian economy in Q3's National Accounts (see here). Concerns around the economic outlook and a general reticence to spend continue to be prevailing themes for households as the Westpac-Melbourne Institute's Index of Consumer Sentiment fell by 1.9% in December to a reading of 95.1, with the headline index remaining inside pessimistic territory for a 4th consecutive month (see chart of the week, below). The deterioration in sentiment over the second half of 2019 indicates a tepid response from consumers to recent stimulus from RBA rate cuts and increases to the Federal government's low and middle income tax offset.
Chart of the week
Chart of the week
The combined impact of this stimulus was a 2.1% surge in household disposable income growth in Q3, though last week's National Accounts indicated this windfall was to a large extent saved as household consumption growth edged up by just 0.1% in the quarter and annual growth slowed to a post-GFC low of 1.2%. Westpac's Chief Economist Bill Evans reports that since the RBA recommenced its easing cycle in June, consumer sentiment has declined by 6.1% and in this latest update views around the economic outlook slipped on both a 12 -month (-1.1%) and 5-year (-2.4%) outlook to partially reverse increases in November. Through the year, consumers' forward-looking assessment of economic conditions has deteriorated sharply; 'next 12 months' -14.2% and 'next 5 years' -11.0% and as a result of this heightened caution, spending has clearly been reined in. Household debt is also weighing as evidenced by a deterioration in views towards family finances, with the 'vs a year ago' sub-index down by 3.6% in December (-9.5%yr) and the 'next 12 months' sub-index easing by 0.5% in the month (-7.0%yr). Accordingly, 64% of consumers nominated deposits, superannuation or paying down debt as the 'wisest place for savings', to be up from 62% in September. Undoubtedly, the stimulus from RBA rate cuts has helped drive a recovery in the established housing market, with capital city prices posting their first quarterly rise in nearly 2 years in Q3 (see here), while more timely data from CoreLogic has shown these price gains have extended into the current quarter. Consumers expect this trend will continue, with the Westpac-Melbourne Institute's House Price Expectations Index rising by a further 3.2% in December to be up by 40.1% over the year. As such, the 'time to buy a dwelling' index contracted by a sharp 5.6% in December and is up only modestly (1.8%) from a year earlier.
In the NAB's Business Survey for November, confidence slid from a reading of +2 to 0 and conditions held steady at +4, with both indexes remaining at below-average levels. The sub-components within the conditions index were mixed, with trading down from +7 to +6 and profitability up from 0 to +3 (both are at below-average levels), while an unchanged reading for employment at +4 saw it remaining above average to be indicative of jobs growth averaging around 18k per month over the next 6 months according to NAB Economics. However, the leading indicators pointed to ongoing caution around the outlook for business investment, with forward orders falling from +3 to -2 and capacity utilisation a touch softer at an around-average 81.8% reading.
