Evening Report | October 9, 2023

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White House: No evidence of direct participation by Iran in Israel attack... Iran is complicit even though the United States has no intelligence or evidence that points to Iran's direct participation in attacks in Israel by Palestinian Islamist group Hamas, White House national security spokesperson John Kirby said. “Iran has long supported Hamas and other terrorist networks throughout the region with resources capabilities training,” said told MSNBC. “And so in that regard, clearly, Iran is complicit here, but in terms of specific evidence on this, these sorts of attacks, no, we don’t have anything.”

President Joe Biden said on Monday at least 11 American citizens were among those killed in Israel following this weekend’s attacks by Hamas. He also said while Washington is waiting to confirm, it is “likely” American citizens are among those being held hostage.

U.S., U.K. to initiate trade talks, but agriculture remains a point of contention... The U.S. and U.K. are preparing to commence trade talks under the banner of the U.S./U.K. Trade Partnership Forum (TPF). These talks are expected to begin this month, with the first chapters completed by early next year.

TPF aims to address non-tariff trade barriers, economic standards and various non-tariff issues. Unlike free trade agreements (FTAs), TPFs do not include tariff reductions and do not require approval by Congress.

Agriculture has historically been a sticking point in U.S./U.K. trade talks, and while TPFs are easier to negotiate, agriculture issues are expected to persist as a contentious topic. U.S. lawmakers have been pressing for broader FTAs, which include new market access commitments, and some have introduced legislation to extend Trade Promotion Authority for negotiating such agreements. The ag sector has also been advocating for resumption of FTA negotiations with various trade partners.

Fed officials closely monitoring surging bond yields... Federal Reserve officials indicated Monday that rising yields on long-term U.S. Treasury bonds, which directly influence financing costs for households and businesses, could steer the Fed from further increases in its short-term policy rate. “We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive,” Fed Vice Chair Philip Jefferson said, nodding to the rise in U.S. Treasury yields and the need for the central bank to “proceed carefully” with any further increases in the benchmark federal funds rate. “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” Jefferson said in remarks to the National Association for Business Economics.

At the same event, Dallas Fed President Lorie Logan, said: “If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate.”

New federal tax credits for EVs offer upfront discounts at dealerships... Starting in January, eligible electric vehicle (EV) buyers can receive a federal tax credit as an upfront discount at the dealership, instead of having to wait to claim the credits on their federal income tax returns. It’s the latest federal move to turbocharge the shift to electric vehicles:

• 50%: The share of new vehicles the White House is pushing to have be electric by 2030.
• Up to $7,500: The credits for new EV vehicles and up to $4,000 for pre-owned vehicles, provided both the buyers and vehicles meet certain requirements.
• $53,469: The average cost of an electric car, per data from Cox Automotive. 

Federal deficit expected to grow... Goldman Sachs economists Alec Phillips and Tim Krupa estimate the federal deficit in the current fiscal year will total $1.7 trillion, and $1.9 trillion in the next fiscal year. That would total 6% of gross domestic product this fiscal year and 6.5% next year, plus interest. Meanwhile, only 2% of Americans surveyed by Gallup said they consider the federal budget deficit or debt the most important problem facing the nation. With neither likely presidential nominee focused on reducing the deficit, it isn’t clear how much will change after the 2024 election, Goldman Sachs wrote.

Wall Street grapples with growing concerns over U.S. bond issuance... The recent bond market turmoil is challenging Wall Street’s long-held belief the U.S. government could easily sell an abundance of Treasuries. Historically, Wall Street and Washington have not been overly concerned about mounting deficits, relying on the assumption that America’s global stature would ensure consistent demand for its debt. However, current market conditions are forcing a re-evaluation, with the possibility of higher-than-expected interest rates needed to facilitate the issuance of government debt, the Wall Street Journal reports.

Seniors drive resilient consumer spending despite rising interest rates... Consumer spending has remained robust, even with the Federal Reserve’s interest rate hikes, largely because seniors are living longer and enjoying a higher quality of life, the Wall Street Journal reports. According to the Labor Department’s survey of consumer expenditures, Americans aged 65 and older represented 22% of total spending in the past year, marking the highest share since records began in 1972. This percentage has risen significantly from 15% in 2010, underscoring the substantial impact of senior spending on the economy.

China’s economy faces threats without reform, report warns... A recent report titled “Running out of road: China Pathfinder 2023 annual scorecard” by the Washington-based think tank Atlantic Council GeoEconomics Center and research organization Rhodium Group has raised concerns about China’s economic stability and global position. The report highlights several key issues facing the world’s second-largest economy, attributing its current economic woes to a failure in implementing necessary reforms. The challenges include a troubled property market, an aging population, declining foreign investment, rising state ownership in key industries and unpredictable regulatory developments.

The report predicts China’s economic growth will be less than 4% in 2023, significantly lower than Beijing’s official target of “around 5%” and calls for structural reforms, such as privatizing state assets and reforming the pension system. It also suggests China’s ambition to surpass the U.S. as the world’s largest economy by the end of the current decade is unlikely to materialize.