Daily Commentary BY THE CURVE TEAM –

Central Bank Challenges Overshadow Trade Deal

16th of January, 2020

The overnight signing of the trade deal was overshadowed by the ongoing challenge faced by central banks.

Phase one of the trade deal was signed by the US and China in an elongated signing ceremony. There were not a great deal of surprises in the full 94 page text of trade deal (which you can find here), with it in line with the details that has been publicised in recent weeks.

It contained an increase in Chinese imports of US goods, details on intellectual property and forced transfer, removing barriers of US financial firms entering China and a commitment from China not to devalue its currency. Enforcement mechanisms of the deal left a little to be desired with a long winded process required before any remedial measures will take place.

The deal is very much a truce rather than a significant step in the right direction. The most significant detail is that tariffs will remain in place with little chance of them rolling back prior to November’s US elections.

Of more significance overnight was further evidence of the struggle central banks are having. Data overnight saw UK CPI undershoot, with the annual rate falling to a multi-year low. The weakness in CPI came about even with the unemployment rate in the UK below 4% and wage growth above 3%. This is something similar to the US data earlier in the week.

It shows just how big the challenge is for the RBA. Unemployment is currently above 5% and wages below 3%. Forecasts suggest driving down unemployment and lifting wages will be difficult over the medium term. The experience overseas suggests the challenge for the RBA could be bigger than it currently anticipates.

David Flanagan

Director - Interest Rate Markets