Broker Check

Trade, Interest Rate Risk Temporarily Lessen

| December 06, 2018
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                Federal Reserve Chairman Powell alleviated financial market concerns last week in a speech at the Economic Club of New York. Powell indicated that interest rates were close to neutral, a strong hint that the current interest rate tightening cycle may be coming to an end. One reason markets have stalled here is fear that the Federal Reserve will raise rates too high, invert the yield curve, and cause a recession. This may still happen, but the immediate risk has fallen considerably. The Federal Reserve will continue to let its balance sheet run off which is a form of tightening. The important point for equity market participants is that the Federal Reserve appears to think upside risks and downside risks are balanced after worrying about rising inflation risks for most of the year.

                Trade war risks have been another concern of market participants, especially the escalation of trade tensions with China. The United States and China are the world’s two largest economies. Escalating trade tensions serve to reduce global economic activity via higher costs to consumers and companies alike. Moreover, escalating tariffs and rhetoric reduce confidence. This has been evident in company conference calls and press releases. New Potomac Partners and other investors have felt a reduction in trade tensions was a necessary condition for the market correction to end.

                  Last weekend, the United States agreed to pause additional tariffs for ninety days. This is a short-term market positive as the worst-case has been temporarily removed. However, nothing has been resolved. The United States will not impose any new tariffs for ninety days. China agreed to resume buying agricultural products and to purchase an unspecified amount of U.S. goods to reduce the trade imbalance. There are a couple other points that the Chinese agreed to, but none of them are binding. The United States and China still need to come to an agreement on the most difficult issues such as intellectual property rights, forced technology transfers, and several other major issues including North Korea.

                  The trade deal is not the best-case scenario nor the worst-case scenario. There are deep-seated trade issues between the China and the United States. While some members of both parties disagree with the negotiating tone or details, there is broad bipartisan agreement in Washington that the current trade environment with China is unfair. It will be difficult to solve all the issues that have built up over the past twenty years in ninety days. It is important for our economy and markets that while the countries negotiate the key points of disagreement, the rhetoric on both sides of the Pacific is toned down. A lessening of tensions does not assure an agreement, but it reduces the probability that an all-out trade war breaks out between China and the United States. NPP doubts that the main issues will be solved any time soon, but this pause is a good first step. Nevertheless, much work remains to be done.

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