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Economic Insights

We offer a brief analysis of the implications of the U.S.-China deal reached at last weekend’s summit.

As investors expected, a trade “truce” between the United States and China was the primary outcome of the just-completed G20 summit meeting in Osaka, Japan. The countries have agreed to continue talking to try to find a way forward to resolve the issues having to do with intellectual property, technology transfer, and increased imports from the United States by China; that was the deal that we were envisioning might happen a few months ago, though it seemed to go off track ahead of the summit.

Based on the fact that the two superpowers are talking again, and the trade disagreement has not escalated to a greater conflict, the G20 yielded a positive outcome, in our view, simply because we avoided the worst case scenarios that would have happened if the countries had walked out and not even agreed to meet again on this topic. The threat of increased U.S. tariffs on July 1 on a broad range of Chinese-manufactured consumer goods is removed and Huawei, and a few other Chinese companies, are allowed to purchase the inputs they need to stay in business, even as they remain on the “entity” list. (Read our analysts’ views on the implications of the Huawei ban for the global technology industry.)

While U.S. trade hawks likely are disappointed in the outcome, we believe the United States’s strategic rivalry with China, and the reconfiguration of global supply chains and trade alliances that flows from that, will continue. This “agreement” allows it to play out more gradually, lowering adjustment costs on all sides. That’s also a positive, since it may increase investment in places like Mexico, Eastern Europe, and Southeast Asia.

Monetary Policy and Investment Implications
What could these developments mean for U.S. monetary policy? We think the U.S. Federal Reserve (Fed) remains committed to a 25 basis point rate cut at the end of July. The possibility of further cuts depends mostly on upcoming data in the United States. (Read my colleague Jeffrey Herzog’s insights on the Fed’s “data dependency.”) The Fed has cited risk factors originating overseas as a reason for increasing monetary accommodation recently, so we believe the G20 news makes policymakers marginally less inclined to cut more. Anything more than 25 basis points is unlikely at this juncture, in our view.

As for investments, we had already believed that a gradual increase in risk exposure for multi-asset portfolios was a good approach ahead of the summit. With the G20 in the books, and a U.S.-China trade truce in effect, a further increase may be appropriate, especially for investments outside the United States. 

 

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