EC Little Resolution In The Week Ahead

Now the protectionist blame other Chinese practices, some of which do not violate WTO rules. The US will not be able to convince a majority to change the rules because, at least in part, the same brush that that paints China would tar many others. The larger the technology gap, the greater the incentive to close it. Americans are quite willing to see it as a moral issue, though when they were on the weak side of the technology gap, say in the second half of the 19th-century in steel production, they too resorted to extralegal methods.

Often China does not have to steal intellectual property rights because foreign businesses agree under the terms of securing large, lucrative contracts. This one of the things that Alstom and Siemens, whose marriage was rejected by European authorities, reportedly have in common, for example. As part of conditions for over $1 bln in orders, each was required to transfer technology to the Chinese state-owned rail car manufacturer, which is now the world's largest train-maker. 

For more than 20 years before Trump took office, there were regular high-level meetings between US and Chinese officials. The Trump Administration ended the practice. Would it be surprising to see the talks resume "for the first time ever?" The long-term rivalry between the US and China will not be resolved here and now.  Contingent advantage is sought here and now.  Given the Trump Administration's apparent sensitivity to the stock market performance, we suspect the tariff freeze will be extended as talks are said to continue to make progress, and perhaps around the middle of the year a deal is struck that reduces the bilateral imbalance and establishes some structure for talks/negotiations,

Besides Brexit and trade, a third issue that will remain unresolved in the days ahead is the state of the global economy.  The synchronized expansion of 2017 had two legacies. The first was that collectively the central banks would reduce their balance sheet expansion and by early 2019 it would turn to contraction  The second was that by the end of 2018, there was concern about a synchronized downturn.  

We submit the situation is more complicated. The reduction of BOJ purchases is because it complemented its QE with yield curve control.   It needs to buy fewer bonds to achieve the same results.  The 10-year JGB yields about minus three basis points, about the least in two-years. Some observers argued last year that the ECB was the only source of demand for some peripheral European bonds. This has proved wide of the mark. Demand for sovereign paper in the opening weeks of the year has been strong, including for Italian bonds.  The 10-year German Bund yield slipped below 10 bp to a two-year low.  The curve is negative out for nine years. We expect the ECB will resist through offsetting mechanisms the premature shrinking of its balance sheet from banks paying back loans under the previous Targeted Long Term Refinancing Operations.  

The US economy surged to over 4% annualized growth in the middle of last year as the fiscal stimulus kicked in, but it was always understood to be unsustainable.  The world's biggest economy but 2.5% growth was is expected in Q4 18 is still above trend and is stronger than most of the high- income countries.  Growth in Q1 19 will take a hit from the record long government shutdown, the cold snap, and the weakness quirk in the first part of the year that is common, even if not fully explicable, since the Great Financial Crisis. 

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Gary Anderson 11 months ago Contributor's comment

One of your best, Marc. The insanity of getting state owned enterprises to pull out of the Chinese economy, when their participation has lifted millions of Chinese out of poverty, is pure American insanity. The US is trying to manage capacity utilization in China. That is truly invasive. Meanwhile Huawei is not permitted to sell to the west. China really should go on its own, with the rest of the world. after Trump slaps massive tariffs on Europe, that union will see who is really making trouble for the world. Us!

Kurt Benson 11 months ago Member's comment

Yes, excellent article!