Stocks are counting on the upcoming US-China trade negotiations to recover from three weeks of a continuous drop. While S&P 500 experienced a 0.3% drop, the Dow Jones Industrial Average faced the same degree of slip thrice, at 0.9%.
The poor performance of Wall Street comes as a result of the disappointing US manufacturing data report. The report highlighted trade as a significant source of weakness for the sector. The data report caused an uproar amongst people who feared that there would be an incoming recession. According to the Institute for Supply Management, the country’s manufacturing activity flunked to its lowest level in more than ten years. The data kickstarted a two-day sell-off where Dow dropped points exceeding 800.
The Continuous US-China Trade War
Recent months showed even higher tension build up between China and the US. Both countries have exchanged tariffs on a large number of products that amount to billions of dollars.
The trade war between these two economic powerhouse states started around three years ago. However, in 2017, the Trump administration released executive orders that called for tighter tariff enforcement, particularly in anti-subsidy and anti-dumping trade cases. The administration also called for a review of US trade deficits and their causes. In the same year head of states met up but failed to reach an agreement. Late into 2017, Trump ordered a more rigorous investigation on the alleged Chinese intellectual property theft. This was considered to be his administration’s first trade measure against Beijing.
In 2018, another bout of tariffs was again imposed on several products such as washing machines, solar panels, steel, and aluminum. Although these products do not solely come from China, a large portion of it does. In retaliation, China imposed its tariff increase at about 25% on more than 100 US products. Trump answered with another 25% increase in tariff on $50 billion worth of Chinese imported products. China did the same for the same amount of US products. The value of products that each country continues to increase tariffs on grew to tremendous amounts reaching up to $200 billion.
The year 2019 started as promising, as the end of the previous year promised a 90-day halt to new tariffs as talks between the two states are being planned. The stop that was supposed to end on March 1 was luckily extended while China remains to step back on almost every aspect of the draft US-China trade pact. The US and China reached a concession at the G20 meeting held in Osaka. But the talk remained unfruitful as Trump increased tariff on $300 billion worth of Chinese imports by 10%. China, on the other hand, halted its US purchases of agricultural products. The most recent measure was taken up by China as it imposed a 5% duty on US crude oil for the first time.
The previous month, however, seems to provide hope that both countries can patch things up. The White House is also reported to hope for the same, as economic advisor Larry Kudlow spoke of “positive surprises” that could come out from the upcoming negotiations this Thursday and Friday. It was September 4 when both states agreed on another high-level talk that is hoped to ease up tariffs from both ends.
Economists Weigh in…
In Peter Berezin’s BCA Research’s chief global strategist, perspective signs, that means progress is crucial at this time for the market to continue moving forward. Every investor will also keep watch of the Federal Reserve that will release the minutes from its September meeting this Wednesday. Last month the Fed cut rates by 25 basis points, which is the second time this year. They also stated that among other factors, they’re also” implications of global developments dor economic outlook.”
Another chief economist at AssetMark, Jason Thomas, offers a different perspective. Thomas says that if parts of the US economy that is exposed to trade are being affected are excluded from the talk; the economy continues to be doing just fine. Thomas also mentioned that the Federal Reserve Chair, Jerome Powell was comfortable to put the reason for the weakness in the administration.
Even so, there remains to be a chance of increased Fed rate cut this week in the middle of the weaker than expected forecast services and jobs-growth data. According to the CME Group’s FedWatch tool, for October, the market expectations rate cut increased by 30%, coming up to 80% from 50% of last week’s.
Since August 2016, the services sector of the US grew at its slowest pace, as mentioned by ISM. The data released by the Labor Department also showcased a slower than expected job growth in the country. In contrast, the stock market experienced an increase after the data mentioned above were released.
The country faces slowing job growth, shrinking manufacturing, low inflation, and the ongoing trade war. As a result, Gus Faucher, a chief economist at PNC, noted that the Federal Reserve is undoubtedly expected to cut the Fed funds rate.