The NFP data tomorrow is likely going to be the market-mover of the day. In all that hubbub, the trade balance might just slip by undetected.
Now, of course, it’s not exactly something you need to have your finger on the button for when it comes to trading. However, it is a major driver of US economic policy, foreign policy and the value of the dollar.
So, it’s definitely still something to keep in mind. Especially now with the fluid situation around COVID-19 and trade relations with China.
One of the things to remember is that, generally, trade balance data is a bit delayed. Therefore, we’ll be getting the figures from January this time around.
January was already going to have a week of trade with China missing, due to the Lunar New Year, with companies stocking up in advance. But then factories and many ports were closed after the holiday to deal with coronavirus effects.
However, trade orders were still going through, and the disruption due to the virus is likely to be minimal.
That said, we might get some statistical data on supply from China, which initially worried investors. This was one of the leading reasons for the sudden drop into correction territory in US stocks last week.
The figures likely won’t be enough to assuage fears of supply issues. However, in the last week, many companies have come out to clarify that they have ample inventory and haven’t experienced any supply issues yet. Still, data usually has a calming effect on the market.
The other factor to include in the analysis is the continuing trade war with China.
Yes, the US and China signed a Phase I deal which at least halted the increase in tariffs, and withdrew others. However, a definitive agreement has yet to be signed. And, the most difficult issue to resolve – intellectual property – is still far from finding a consensus.
China has repeated that they will adhere to their commitments required by the Phase I deal, despite the economic effect of COVID-19.
What We Are Looking For
Last week, we got the report from the goods trade balance, which constitutes the largest component of the US trade balance. Or, more accurately and relevant to policy issues, the US trade deficit.
The US is a net exporter of services, which usually reduces the total trade balance a bit. But not much.
The consensus of expectations is for a slight drop in the trade deficit to $46.1B from $48.9B prior. This includes the effect of businesses front-loading orders in December, ahead of the Lunar New Year.
A Little Early
The Phase I agreement didn’t go into effect until February. That means that Chinese purchase commitments will not be represented in the data to be released.
The objective of the Trump administration would be to reduce the deficit significantly by March. There could be a return to trade tensions if the President is not satisfied in the progress towards reducing the trade deficit.
The more difficult part of US trade negotiations with China is on-going. And the trajectory of the trade deficit is likely to factor into whether the two countries can reach a second agreement.
A significant reduction in the deficit would be a key point for Trump to make in an election year. But, so would securing Chinese customers for agriculture products from the Midwest.
With the cases of coronavirus officially on the wane in China, trade could soon return to be the major issue for Asian markets.