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Weekly Talking Points

February 8, 2019

Global Trade is Falling Down,
Falling Down
Following a crackling six-week surge, global equities took a step back this week on a
wave of soft economic data—especially from Europe—and renewed concerns over
prospects for the U.S./China trade talks. After brushing up against the 200-day
moving average earlier this week, the S&P 500 dipped through the back-half amid
trade jitters. In tandem, longer-term Treasury yields revisited levels not seen since the
opening days of the year (the 30-year fell below 3%). While the rally in North
American bonds has been impressive, it can’t hold a candle to the move in German
bunds, where the 10-year yield has careened down to just 8 bps (yes, 0.08%) from a
peak of 77 bps almost exactly a year ago. Completing the risk-off move this week,
the U.S. dollar took a small step forward and oil prices sagged somewhat.
The main driver for this week’s moderate market angst was not the State of the Union,
it was the State of the Global Economy. A suddenly much more subdued tone around
the negotiations with China—which resume in Beijing on February 14, at a “high
level”—rattled the cozy consensus that a half-loaf deal could be reached by the March
1 deadline. It turns out that the Presidents are not going to meet before then, suggesting
that an extension of talks may be the best possible outcome at this point.
Suffice it to say that we have long been sceptics on a successful conclusion on the
U.S./China file. Consider, for example, the painful NAFTA negotiations: In that case,
we had a perfectly good agreement to begin with, a moderate bilateral imbalance
(between the U.S. and Mexico), and generally positive relationships between the three,
and it took more than a year of hard bargaining. In this case, we have no current deal, a
massive bilateral imbalance, the U.S. aiming for structural changes, and two
adversaries at the table. Simply, there is no way that a full-meal deal can be reached in
a short period of time. Whatever unfolds in the next three weeks, one would suspect
that this issue will hover over markets for many, many months to come.
As a brief sidebar on NAFTA/USMCA, note that even this—seemingly
uncontroversial—deal is going to face tough sledding in Congress (see this week’s
Focus for some of the procedural details). A piece this week in the New York Times
indicated that the USMCA faces serious resistance on both sides of the aisle, and of
course it arrives at a time of a Grand Canyon-style political divide. The fact that a
number of Republican Senators are warning the President not to terminate NAFTA (in
order to force the House’s hand on USMCA) is cold comfort; it’s a positive that they
are prodding him, it’s a negative that they feel the need to do so. From Canada’s
perspective (and Mexico’s), the prospect of many more months of uncertainty on the
trade file is about as welcome as endless replays of the Super Bowl half-time show. But
at least the two NAFTA partners may be spared some of the worst possible
protectionist measures, since they won’t be responsible for any delays in the new pact.
On top of ongoing concerns about the outlook for trade, we saw a wave of weak trade
and production data looking backwards this week. Recall that it was only in late September
that the U.S. imposed the latest round of big tariffs on China (10% on
$200 billion of imports), and the global data may now only be catching up with the
resulting chill in activity. Germany, in particular, has been harshly sideswiped by
the cooldown in trade, and in China’s economy specifically. As one wag put it,
“another day, another piece of terrible German data”. The stand-out was a fourth
consecutive monthly drop in industrial production in December, leaving it down a
hefty 3.9% y/y. That’s weaker than in the depths of the Euro crisis, and cannot be
explained away by any special factor as many sectors are flagging. This coming week
will bring Q4 GDP results for Germany and the Euro Area on Thursday, and we look
for gains of just 0.1% and 0.2%, respectively.
To highlight just some of the other sickly figures pointing to a notable slowdown
in global trade:
  •  The Baltic Dry Index fell to its lowest level in almost three years this week and is now down 44% y/y.
  •  U.S. imports tumbled 2.9% in the (delayed) November trade figures.
  •  A measure of global trade volumes (from CPB) sagged 1.3% in the three month to November, its biggest  slide since mid-2015.
In this environment, there was a wave of downgrades to the 2019 growth outlook in the
industrial world, which, in some cases, took an end run around our already subdued
forecasts. Most notably, the EU carved its call for GDP this year to 1.3% (from 1.9% as
recently as November), while the BoE cut the U.K. call to 1.2% (from 1.7%, also in
November). Even the lucky country got into the act, with the RBA slicing its GDP
outlook half a point (albeit to a still solid 2.75%—this is, after all, the country that
hasn’t had a recession since pre-internet days, or around the time the wheel was
discovered). While none of the revised forecasts are especially controversial or
surprising, the synchronicity of the sudden downgrades is telling, and simply reinforces
the point that we are in a very long pause for interest rate hikes globally.
The Bank of Canada was arguably at the forefront of the global growth
downgrades, having chopped its 2019 call way back in the first full week of the year.
At that time, the MPR sliced the GDP outlook to 1.7% (a snick below our current call
of 1.8%) and down from the previous 2.1% projection. And recent results such as the
0.1% drop in November GDP and ongoing softness in domestic auto sales (-7.3% y/y
in January) seemed to fully reinforce the more subdued outlook.
Of course, in oh-so-typical Canadian fashion, this week’s run of data suddenly turned
perky, highlighted by a powerful 66,800 jump in January jobs (replete with a record
111,500 surge in private sector positions), as well as solid readings on permits and
starts. While we wouldn’t call employment a lagging indicator—it’s actually a very
good co-incident indicator, historically—Canada’s jobs figures are about as
consistent as the Rams’ offence (but the punting, wow). Beyond that unreliability,
headline job gains are flattered by the fact that the working age population is soaring
as well, up a record 432,000 in the past year (or 36,000 a month). In other words,
Canada requires a steady stream of employment gains that appear strong on the
surface, just to keep the unemployment rate steady. It’s striking that even after just
reeling off the strongest five-month run of job gains since 2002, Canada’s 5.8%
unemployment rate is now unchanged from last year’s average.

Douglas J. Porter, CFA | Chief Economist | Managing Director, Economic Research