Macroeconomic & Geopolitical

Growth Near an Inflation Point, Trade Remains a Wild Card

December 2019 – 4 min read
Leading indicators appear to be bottoming out and pointing to economic healing but geopolitical tensions revolving around trade and international security continue to cloud the outlook.

Overview

NATO: The 70th annual NATO summit held in London this week made headlines for several spats between the 29 leaders. The week kicked off with tensions high between U.S. President Donald Trump and French President Emmanuel Macron and ended with a tiff between Trump and Canadian Prime Minister Justin Trudeau. Throughout the summit, Trump made known his displeasure with those NATO allies who have not met their defense spending target of 2% of GDP, while the U.S. is spending above its target. The spotlight on frictions between the allied leaders added to the heightened level of uncertainty around the globe, especially as Trump simultaneously announced tariffs on several countries throughout the week. On a more positive note, the NATO summit concluded with an agreement surrounding the security of communications—particularly the 5G mobile phone networks. While they did not specify Huawei or China in this agreement, a greater emphasis was placed on China during the summit.

Leading Indicators: Global manufacturing PMIs are aligning with the bottoming out narrative. The Global manufacturing PMI rose for the fourth-consecutive month and entered into expansionary territory, at 50.3, in November. In Europe, despite remaining in contractionary territory, the EZ manufacturing PMI rose for the second-consecutive month to 46.9 in November, and new orders and output notched increases. In Asia-Pacific, both China’s official and Caixin manufacturing PMIs posted expansionary numbers in November. Manufacturing in Japan remains stuck in the mud and demand conditions are deteriorating, though the manufacturing PMI edged up from 48.4 to 48.9. There were mixed signals in the U.S., with the ISM manufacturing index coming in below expectations in contraction territory with weak readings in forward-looking details, while the Markit manufacturing PMI rose higher into expansionary territory. While data will likely remain somewhat mixed in coming months, the worst seems to be over for the manufacturing sector.

Trade: Trade tensions are not easing as quickly as anticipated, which is adding to downside risk as the soft landing many are forecasting hinges on easing in trade tensions. Markets were volatile this week when President Trump initially made a statement that he would be willing to hold off on the trade deal with China until after the 2020 elections; then reports surfaced that the two sides were moving closer to a deal. The White House also noted that euro auto tariffs are not off the table, and threatened retaliatory tariffs on France. Adding to the pile, Trump announced that he will place tariffs on steel and aluminum from Brazil and Argentina, as pressure on U.S. agriculture mounts.

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Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

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