Trade tensions between the U.S. and China calmed down last week, as China is planning to reduce tariffs on U.S. automobiles by 25% and increase purchases of U.S. agricultural products, including soybeans and corn.
It was also reported that Chinese President Xi is looking to revisit the country’s controversial “Made in China 2025” plan. This contentious plan positions China to become a global leader in advanced manufacturing, but it’s often interpreted as giving Chinese companies a green light to forcefully acquire U.S. technology trade secrets.
Part of the reason for China’s willingness to negotiate is that there are signs of its economy slowing, and the trade war is making that worse. With that said, it’s still unknown if China will compromise enough to satisfy the U.S. and end the trade war.
The U.S. economy, on the other hand, is doing quite well. Consumers stepped up their holiday spending much more than economists were expecting as “core” retail sales surged 0.9% in November compared to October. Because consumer spending makes up about 70% of the U.S. economy, some economists are expecting economic growth in the final quarter of 2018 to approach 3%.
This week’s economic calendar is packed with important reports on housing, manufacturing, and inflation. But the biggest event will be the Federal Reserve’s (Fed) last meeting of the year on Wednesday, December 19th. The Fed is widely expected to increase short-term interest rates, but what’s unknown is how many times the Fed will raise rates in 2019.
Wall Street will also be watching to see how the government funding showdown progresses. President Trump is seeking $5 billion for a border wall to sign a spending bill to keep the government running, but Democratic leaders have offered just $1.6 billion for border security. If there is no agreement or there isn’t a short-term extension, about 25% of the government will lose funding.
The Simply Money Point
The U.S. economy is currently in good shape. Strong consumer spending should continue well into 2019, allowing the economy to grow around 2-3% next year.
However, uncertainty around the trade war and the Fed’s interest rate hike plans are weighing on markets. This type of market turbulence is normal, but when it happens, it’s easy to believe we’re on the verge of something worse than it turns out to be.