HIGHLIGHTS OF THE WEEK
- It was a relatively quiet week for economic data. The trade deficit narrowed a bit in September, but new tariffs appear to have weighed on both exports and imports. The ISM non-manufacturing index followed its manufacturing counterpart higher in October, with the recent trend indicating a stabilization in activity.
- Trade negotiations continued to dominate headlines. Comments from the U.S. Commerce Secretary suggest that the U.S. is likely to avoid a major escalation in trade tensions with Europe next week over autos.
- The interim U.S.-China trade deal is unlikely to be signed this month, but the mid-December tariffs still appear likely to be scrapped. Pres. Trump poured cold water on the notion that there was an agreement on removing existing tariffs.
The Deal With The Deal
It was a relatively quiet week for economic data. The September trade report had a bit of a dated feel since last week’s GDP report already confirmed that net exports were a drag on third quarter economic growth. Still, the report drove in the point of tariff-related volatility in trade activity. The trade deficit narrowed a bit in September as goods imports contracted more than goods exports. This reflected, in part, the impact of tariffs on a large tranche of consumer goods imports from China imposed on September 1st.
The ISM non-manufacturing report, on the other hand, ushered in a bit of optimism. The headline index followed its manufacturing counterpart higher in October, with the improvement broad-based across the subcomponents. While a bit better than expected, the October uptick was not large enough to offset the decline in the month prior. As such, instead of a major strengthening in the pace of expansion, the recent trend is more indicative of a stabilization in activity (Chart 1).
Other second-tier data reports did little to rock the boat. Of note, job openings continued to edge lower in September, reinforcing the notion that appetite among U.S. employers for labor, while elevated, has waned a bit recently. The September data also affirmed that the pullback in job openings so far has limited geographic breadth, with recent pressures concentrated in the Midwest (Chart 2; for more see here).
With little else on the data front, trade negotiations had a free hand at driving headlines. On this front, there were signs of a de-escalation in trade tensions between the U.S. and other major trading partners, importantly the E.U. and China. Auto tariffs remain a major concern for the former, and President Trump is set to make a decision on the matter by next Wednesday. The U.S. Commerce Secretary recently stated that he expected negotiations with “individual companies about their investment plans” to bear fruit, making the imposition of auto tariffs potentially unnecessary. This suggests that the administration will avoid a major spike in tensions next week, either by taking a lighter approach on auto tariffs or by deferring action to a later date.
When it came to China, developments were more capricious. For starters, contrary to initial hopes, the Trump-Xi meeting to sign the ‘Phase One’ trade deal is unlikely to happen this month. On the other hand, it appears likely that the tariffs that were slated to go into effect in mid-December will still be scrapped (provided that the interim deal remains on track to be signed in the near-term). China’s Commerce Ministry spokesperson suggested that the two economic heavyweights had agreed to roll back existing tariffs in phases as trade talks advanced. But this morning, President Trump poured cold water on the notion of such an agreement, while also stating that he will not fully eliminate tariffs on China. This softened some of the optimism that had built from China’s earlier announcement, highlighting the delicate and volatile nature of trade negotiations.
All in all, there are indeed signs of a de-escalation in trade tensions, which help dilute some of the near-term risk as economic activity shows signs of stabilizing. But, as today’s events have shown, we caution against reading too much into the recent optimism, for as long as core issues remain unaddressed, a re-escalation in the trade war remains a distinct possibility.
Admir Kolaj, Economist | 416-944-6318
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