U.S.-China agreement doesn’t ease pressure on Fed

A ceasefire in the U.S.-China trade war is doing little to relieve pressure on the Federal Reserve to stimulate the economy.

The two countries agreed on Saturday to resume trade talks after U.S. President Donald Trump offered concessions to his Chinese counterpart, Xi Jinping, when the two met at the sidelines of the Group of 20 summit in Japan. As part of their latest agreement, Washington promised no new tariffs and an easing of restrictions on Huawei Technologies Co. China agreed to make unspecified new purchases of U.S. farm products and return to the negotiating table.

But the Fed, which signalled rate cuts could come soon due partly to uncertainty caused by the trade war, still faces a slowing global economy as well as businesses domestically putting off spending until China and the United States reach a lasting truce.

“It does appear that, in particular, the negotiations between the U.S. and China are resuming, which is obviously a positive development,” Fed board of governors vice-chair Richard Clarida said on Monday at an economics conference in Helsinki, “but beyond that, ultimately, how those negotiations are resolved is certainly going to be an important factor in thinking about prospects for the global economy.”

Clarida said the U.S. economy is currently “in a good place” but that “uncertainties have increased along several dimensions.” Data released on Monday by the Institute for Supply Management showed the U.S. manufacturing sector expanded in June but at the slowest pace since October 2016.

Markets are overwhelmingly betting the Fed’s next move will be its first rate cut since the global financial crisis a decade ago, and Trump has demanded easier policy to strengthen the economy and his hand at the negotiating table with Beijing.

On Monday, global stock benchmarks jumped on the weekend’s trade news, with the S&P 500 opening and closing at a record high. U.S. stocks finished off earlier highs, led by gains in technology stocks on signs of a reprieve for Huawei.

“There was celebration on the open and it was a case where if some of this trade uncertainty goes away, even if it is not solved, so to speak, that decreases the likelihood the Fed needs to step in, or at least step in as aggressively as people were thinking about a week-and-a-half ago,” said Willie Delwiche, investment strategist at Robert W. Baird in Milwaukee.