Recently, President Donald Trump finally signed "Phase 1" of his trade deal with China more than eighteen months after first implementing tariffs. The deal relaxes tariffs on some Chinese imports, it also delayed the implementation of tariff hikes in the coming months. China agreed to increase its imports of U.S. products.
The deal avoided delving into thornier issues like intellectual property violations or state-sponsored corporate and academic espionage that were reasons for previous deals falling apart at the last moment. Both sides also pledged to continue working on "phase 2" where it's assumed these more structural issues will be addressed.
Underwhelming Market Reaction
President Trump's pattern is to sell every deal as a transformative achievement regardless of the substance. This was the pattern with the tax cuts in 2018 and the USMCA trade deal. So far, the market reaction to the "phase 1" deal has been pretty blase. Some reasons are that the deal's signing and details had been telegraphed many months in advance, so nothing new emerged with its official signing. Additionally, it lacks an enforcement mechanism, so there's no guarantee that it will be honored.
The most meaningful indicator of the deal's impact is agricultural commodities. As part of the agreement, China pledged to purchase $32 billion in U.S. agricultural products over the next two years. Since soybeans are the largest component, its price behavior is a window into the market's assessment of the deal's impact.
Soybean prices have declined since the deal was signed by around 5%. Since the trade war began in the fall of 2018, soybean prices have been confined to a relatively tight range between $800 and $950 per bushel. At the time of President Trump's election in November 2016, soybeans were trading for around $1,000 per bushel.
Market Impact
It's clear that this price action reveals skepticism that the trade deal will be a game-changer. Rather, the status quo persists. Futures markets exist to immediately price in any current and future shifts in supply and demand, even if it's merely anticipatory. The collective shrug from soybean prices and other agricultural commodities reveals more about the trade deal than comments from a politician.
Although financial markets remain quite strong in this momentum-fueled rally, it's becoming increasingly clear that stimulus from the trade deal should not be part of the bullish calculus. There was a notion that the trade deal's signing would unleash pent-up demand in capital spending and in manufacturing that would lead to economic growth turning from deceleration to acceleration. Although this is still possible, it's more unlikely as the trade deal is not significant enough to positively impact economic activity in a meaningful way.