China officials, agencies virtually silent on talks | Boris Johnson wins big in U.K. elections
In today's updates:
* Another agreement in principle with China announced by U.S. officials, not China
Markets: Global stocks surged after news of the trade deal and Boris Johnson's triumph in the U.K. election. The Stoxx Europe 600 rose to a record high, the FTSE 100 gained and sterling jumped. U.S. equity index futures rose, the dollar fell, Treasuries and gold were steady, and oil moved higher. The U.K's FTSE 250 index rose 4.5% and the pound hit its highest level since June 2018 after the U.K. elections results.
— U.S./China trade policy update:
- Agreement in principle (AIP) 2.0. On Oct. 11, President Donald Trump in the Oval Office and on national television announced U.S. negotiators had reached an “agreement in principle” with China regarding Phase 1 topic, including a commitment from China to buy $40 billion to $50 billion of U.S. farm products. Trump said all that had to be done was getting the agreement written. On Thursday, Trump and other administration officials announced an agreement in principle had been reached.
- There has been no official confirmation from the White House that a deal has been done, while Chinese media suggest there still may be more work to do.
- AIP 2.0 includes the U.S. rolling back some existing tariff rates on Chinese goods and canceling new levies set to take effect Sunday as part of a deal to boost Chinese purchases of U.S. farm goods and obtain other concessions.
- What about China tariffs? While the focus is in part on whether the U.S. will impose new tariffs on $156 billion in Chinese goods, it is also not yet clear whether China will go ahead with the tariffs they announced in late August of 10% and 5% on more than 3,300 types of U.S. goods, including auto parts and chemicals, starting on Dec. 15.
- The text of the agreement has not been finished and it is unclear whether China has agreed to all of the details included in the plan.
- Will the text be released? Maybe not immediately. Michael Pillsbury, a trade advisor to President Trump, revealed on Fox Business Network Thursday evening that the text may not be unveiled to not make public “all the concessions” China made to the United States. “Without public text of the agreement, there is no true deal,” said Derek Scissors, a trade expert at the American Enterprise Institute. “The president will get hammered on a deal no matter what—the real test is if he sticks to it when the heat rises.”
- Purchases are not just farm products but include energy and “other” goods. Pillsbury said he spoke with Trump, who said the deal calls for China to buy $50 billion worth of ag goods in 2020, along with energy and other goods. In exchange, the U.S. would reduce the tariff rate on many Chinese imports, which now ranges from 15% to 25%.
- China reportedly offered to buy $200 billion worth of U.S. goods and services over the next two years — a total that would include the previous U.S. demand that China buy between $40 billion and $50 billion worth of American farm goods. President Trump reportedly liked the $200 billion figure. U.S. agricultural exports to China were just $10 billion in the first 10 months of 2019, down from nearly $20 billion in 2017 before the trade war began. U.S. oil, fuel and lubricant exports were $4 billion over the same period, also about half their 2017 levels.
- China pushback? Eunice Yoon, CNBC's correspondent in China, reports that she's hearing from a government source there that Chinese leaders are reluctant on the deal because of the firm farm purchase targets.
- China will reportedly nix restrictions on growth hormones for beef and ease its approval process for genetically modified crops.
- Should Beijing fail to make the purchases it has agreed to, perhaps reviewed on a quarterly basis, original tariff rates would be reimposed. Trade experts call that a “snapback” provision, though the president didn’t use that term, Pillsbury said. To ensure that China keeps its commitments, the Trump administration has insisted on periodic reviews, as well as an agreement that China’s agricultural purchases would not drop below a certain amount. If China violates the terms of the agreement, removed tariffs would snap back into place.
- Tariff cut announcement today. Pillsbury said a “goodwill gesture” would have the Trump administration announcing some tariff rate cuts today. “The president is upbeat and enthusiastic about his breakthrough,” according to Pillsbury.
- The apparent AIP 2.0 deals with topics other than farm and energy product purchases. President Trump stressed that the Phase 1 deal includes measures to improve intellectual property protection, open the Chinese financial services market and commit to greater transparency surrounding the management of China's currency.
- Phase 2 and perhaps a Phase 3 would follow with more difficult issues, including forced-technology transfer, subsidies, and the behavior of Chinese state-owned firms. But most think if there are any agreements past Phase 1, they would not come until after 2020 U.S. elections.
- U.S. trade hawks do not like the recent developments if confirmed by China, noting that rolling back tariff rates could take away U.S. bargaining clout for future negotiations with China on later phases of the deal. Sen. Marco Rubio (R.\-Fla.), an outspoken China critic, said via Twitter that the “White House should consider the risk that a near-term deal with China would give away the tariff leverage needed for a broader agreement on the issues that matter the most such as subsidies to domestic firms, forced tech transfers & blocking U.S. firms access to key sectors.” Senate Democratic leader Chuck Schumer (D-N.Y.) led a letter from Democrats saying that “failure to secure commitments from the Chinese government to enact substantive, enforceable, and permanent structural reform will jeopardize American jobs and long-term economic prosperity.”
- What about China? Thursday’s apparent agreement, according to the New York Times, “appears to be a big victory for the more nationalistic wing of the Chinese government, which has argued consistently that the Trump administration will back down a considerable extent on tariffs if Beijing stands firm.” None of China’s state-owned media outlets or economic agencies involved in the trade negotiations made any public statement on Friday about the deal endorsed by President Trump. China's envoy to Washington, Cui Tiankai, could sign the deal today. Foreign Ministry spokeswoman Hua Chunying said that any resolution of the trade dispute with the U.S. has to be mutually beneficial, but she stopped short of saying the two sides had reached a deal. "As soon as reports emerged suggesting a phase one deal had been reached, major stock markets in the U.S. and Europe jumped," she noted. "This illustrates that a deal through negotiation is beneficial to both nations and their peoples, and it is what the international community wants." But she insisted that the "agreement has to be mutually beneficial." Foreign Minister Wang Yi said that information would be released as soon as possible, with the South China Morning Post reporting that Hu Xijin, editor in chief of the Global Times tabloid, tweeted that China has kept quiet as it is a delicate situation. Xinhua is very quiet as is People's Daily and China Daily.
— Will another agreement in principle with China impact Market Facilitation Program (MFP) payments to farmers? That would include a possible third installment of MFP 2, and what many initially thought would be a third year of the program for 2020. There certainly are Trump administration officials who would fight another year of the payments, with the odds of a third MFP 2 installment likely being made, but not guaranteed.
— What-ifs in any big China buys of U.S. farm products ahead. A Wall Street Journal article notes that, “If U.S. farmers somehow massively ramp up production, that risks further pushing down global prices as Brazilian and European goods ditched by China flood back onto global markets. If U.S. farmers don’t raise production that much, China can take back a share of U.S. exports by offering higher prices, but that will make U.S. products less competitive elsewhere, including in the U.S. itself. The U.S. could end up exporting a lot more to China but then sending far less to the rest of the world — or even importing more from Canada and other trading partners as U.S. food prices rise.”
— Bipartisan budget deal reached. Top Democratic and Republican lawmakers said they reached a tentative agreement on federal government spending, giving Congress and the White House about a week to approve details before funding runs out after Dec. 20. “There’s a meeting of the minds,” House Appropriations Chairwoman Nita Lowey (D-N.Y.) said.
Negotiators are now focusing on a small list of remaining issues. Text is expected to be released Monday.
The bipartisan accord covers nearly $1.4 trillion in discretionary government spending across a dozen bills for the rest of the fiscal year, which ends Sept. 30, 2020.
House members said they aim to bring packages of the bills to the floor on Tuesday, giving the Senate a few days to decide on the legislation before the end of next week. "It is my hope that we will consider those appropriations bills on the floor on Tuesday; perhaps a series of minibus packages to fund all of government for the remainder of the fiscal year," House Majority Leader Steny Hoyer (D-Md.) said Thursday afternoon. Hoyer said he'd discuss with Lowey how many packages they plan to put on the floor. Both parties have pledged to avoid another omnibus bill encompassing all 12 bills since the fiscal 2018 law was enacted in March 2018.
Appropriators plan to give the Trump administration $1.375 billion for border barrier construction, significantly less than the $5 billion the White House hoped to receive in new funding for the Department of Homeland Security, but the same amount Congress approved in fiscal 2019, according to a source familiar with the negotiations.
— More disaster aid deal worked out. WHIP funds from 2017 are reprogrammed not to expire at the end of the year — the expected unused dollars from 2017 fund equals about 1.5 billion. Also, excess moisture, drought, and quality losses are covered. Block grant authority was provided additional $400 million. Sources say there now appears to be sufficient funds to meet prior disasters for 2018 and 2019, but they may need to tap into 2018/19 dollars that are unused.
— What about tax incentive extenders? It looks like key House Democrats are back to a big package and that will present approval hurdles for items like the lapsed biodiesel tax incentive, congressional sources advise.
House Ways and Means Chairman Richard Neal (D-Mass.) reportedly altered his prior view this week for a “skinny” package of tax provisions that did not include more than $100 billion worth of refundable tax credits for low-income workers and families that Neal has been pushing since June. But on Thursday, Neal changed. Asked if the skinny package was still on the table, Neal said, “Nah. We’re trying to negotiate a big ending... Everything's in the mix now.”
In the Senate, Republicans appeared downbeat on the prospects for a tax deal before the year is out. Sen. Pat Roberts (R-Kan.) said he thought January was more likely.
Bottom line: Whatever may occur in the House on this topic, it appears there is no consensus in the Senate; thus, the Roberts’ punt into 2020.
— Other items of note:
Boris Johnson and Brexit win big in U.K. elections. Britain’s prime minister and his Conservative Party won a commanding majority in Parliament on Thursday, paving the way for the country’s withdrawal from the European Union next month. The opposition Labour Party suffered its worst showing in more than 80 years, putting pressure on its leader, Jeremy Corbyn, to resign. He said today that he wouldn’t lead the party into another election but would stay on for the time being. Johnson's government is expected to introduce legislation to complete Brexit before Christmas. But Britain’s departure would still probably not happen before Jan. 31, the date agreed upon with the European Union. Details of election: Boris Johnson’s Conservative party won a large majority in the House of Commons, taking 364 seats out of 650 with only one constituency remaining to declare its results — a gain of nearly 50 seats since 2017 and the party’s biggest majority since the era of Margaret Thatcher. The Labour Party won just 203 seats, losing nearly 60 since its strong showing two years ago.
House panel delays its impeachment vote. The chairman of the House Judiciary Committee halted a marathon drafting session on two articles of impeachment against President Trump, calling for the session to resume this morning with votes at around 9 a.m. CT.
FDA finds source of separate E. Coli outbreaks. The Food and Drug Admin. (FDA) has identified a common romaine lettuce grower among three separate foodborne illness outbreaks caused by strains of E. coli O157:H7. The agency said it’s a “notable development” in its investigation with the CDC and state health officials to pinpoint the exact source of the contamination in Salinas, Calif., but cautioned that it’s still too early to “conclusively determine” whether other sources are involved.
Federal judge halts Arkansas law on plant-based food labeling. A federal judge blocked an Arkansas law preventing plant-based food from using labels identifying the products as meat like “burger” and “sausage.” Link for details from the Arkansas Democrat Gazette.
New program to modernize rural freight rail. Transportation Secretary Elaine Chao yesterday announced a new pilot program called the Railroad Rehabilitation and Investment Financing Express (RRIF Express) that aims to expedite request for long-term, low-cost loans meant to to modernize aging short line and regional freight railroads. The program can have “up to $35 billion in outstanding principal amounts from direct loans and loan guarantees at any one time,” according to the notice published in today’s Federal Register (link) and will also provide up to $26 million in additional financial support.
USTR notice on U.S.-EU hormone-free beef deal: Link.
Food retailers are making big bets on small warehouses to bulk up their growing delivery businesses, as supermarkets try different approaches to get groceries to customers more efficiently, the Wall Street Journal reports (link). Albertsons, Walmart and other chains are building small fulfillment centers near existing stores and customers to quickly fill online orders. More grocers are choosing this strategy over the larger, remote distribution centers that Kroger and Koninklijke Ahold Delhaize NV’s Peapod division are building to make deliveries over wider areas.
— Markets. While all three major indices touched new intraday records on the US-China trade hopes on Thursday, only the S&P 500 and Nasdaq finished at new record marks. The Dow gained 220.75 points, 0.79%, at 28,132.05. The Nasdaq was up 63.27 points, 0.83%, at 8,717.32. The S&P 500 rose 26.94 points, 0.86%, at 3,168.57.
Christine Lagarde, in her first press conference as president of the European Central Bank, said monetary policy would remain “accommodative” for a long time to perk inflation up, as wage growth had passed through to prices only weakly. She also said that a review of the bank’s monetary strategy would “turn each and every stone,” but would finish in 2020.