Macro (Re)view (17/1) | Phase one deal finalised; risk rallies further

The long-awaited signing of the phase one trade deal between the US and China occurred in Washington this week, with the full text of the terms made public for the first time (see here). On the US side, the finalisation of the agreement ensures the 15% tariff applied on a $120bn tranche of consumer-related goods imported from China will be reduced to 7.5%, while a planned tariff that was to levied on a separate $160 list of Chinese-produced goods, including electronics and clothing, from December 15 remains suspended, though the 25% duty remains on a $250bn tranche of imports, with US Treasury Secretary Steve Mnuchin indicating this could form the basis of negotiations towards a phase two deal. In return, China has agreed to expand its purchase of US goods and services by at least $200bn above the level from 2017 over the next two years, with $76.7bn of this to come in year one followed by the remaining $123.3bn in year two. This is headlined by a requirement for China to increase its purchase and import of US agricultural products by at least $40bn per year for the next two years. In addition, China has granted concessions around intellectual property, forced technology transfers, allowing greater access to its domestic market for financial services firms and refraining from competitive devaluations of its currency. The agreement contains an overarching enforcement mechanism, whereby tariffs or other penalties can be implemented if disputes are unable to be resolved through bilateral consultation.

In the US this week, any immediate concerns of an impending softening in the household sector following last Friday's employment report were ameliorated by a solid outturn from retail sales that advanced by a stronger-than-expected 0.3% in December that accelerated the annual pace from 3.3% to a 16-month high of 5.8%, while core sales also outperformed rising by 0.5% in the month and by 5.7% through the year to its fastest pace since July 2018. Completing the set, the retail control group (more closely aligned with consumer spending in GDP calculations) lifted by 0.5% in December against an expected 0.4% rise, rebounding from a weak outcome in November (-0.1%). With inflation data during the week indicating a contained profile at 2.3%Y/Y to December on both headline and core basis, the US Federal Reserve can maintain its accommodative stance in 2020, particularly if the household sector were to show any sign of weakening, while according to reporting from Fox Business, the Trump administration is considering a fiscal stimulus package to take to the upcoming election.

Over in the continent this week, the Account of the European Central Bank's policy meeting in December conveyed the message that the Governing Council was reasonably constructive in the circumstances, noting they had seen signs of stabilisation in the data flow, and while the risks to the outlook were still "tilted to the downside" they were now assessed as being "somewhat less pronounced" due to an easing in the intensity of headwinds from offshore. In the near term, the Governing Council sees the outlook as being "muted" but is anticipating a "moderate recovery" to occur "later on". As such, and with new President Christine Lagarde focused on establishing a more unified Governing Council, the Account noted the current monetary policy stance "appeared fully appropriate, lending substantial support to growth and inflation developments", indicating that its wait-and-see approach is likely to remain the way forward. Developments in the UK appear to have reached a more nuanced juncture, with prospects for a Bank of England rate cut strengthening this week. On the data front, GDP growth contracted by 0.3% in the month of November to be tracking at just a 0.6% annual pace; inflation was weaker than expected sliding to a 3-year low in December on both headline (1.3%Y/Y) and core (1.4%Y/Y) measures (see chart of the week, below) and is well below the Bank's 2% target; and retail sales fell by 0.6% in December. This came after a speech from Monetary Policy Committee member Saunders in which he outlined his reasoning in voting for a rate cut at the previous two policy meetings.  

Chart of the week

Late in the week, the latest round of data from China was released and was constructive overall, suggesting that activity in the world's second-largest economy was showing signs of stabilising. GDP growth was 1.5% in Q4, which maintained the annual pace at 6.0%, while growth in 2019 came in at 6.1% — its slowest pace of expansion since 1990 — and was at the lower end of the 6.0-6.5% range targeted by authorities in Beijing. The highlight was a robust outperformance from industrial production rising by 6.9% through the year where the consensus was for growth of 5.9%, while retail sales at 8.0%Y/Y and fixed asset investment at 5.4%ytd printed slightly above forecasts.

In a light week in Australia, the strong performance of the nation's benchmark S&P/ASX200 equity index in the early days of the new year came into focus as it surpassed the 7,000 level for the first time and closed out the week at a record high. The main data point from the week was November's housing finance update where the upswing in commitments from mid-2019's trough remained intact rising by a further 1.8% in the month and by 5.9% over the year — its fastest pace in more than two years (reviewed here). The owner-occupier segment continues to lead the way, with the value of commitments expanding for a 6th straight month to be up by 10.0% through the year, while the investor segment saw a 2.2% rise in November but remained in contraction in annual terms at -3.2%. Overall, the report was consistent with improving established housing market conditions, driven by the combination of the passage of the federal election, RBA rate cuts and an easing in credit assessment criteria. In the week ahead, Australia's labour force data for December are due to be released on Thursday, with the median forecasts looking for employment to rise by 12.0k and the unemployment rate to hold at 5.2%. 

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