Fed Fears and Trump's Mouth Lead Equities Lower and Policy Concerns Higher

Posted on 03/21/2019 7:04 AM

If China believes President Trump, U.S. tariffs will remain far longer than China wants

It was clearly a negative day Wednesday for market-related news for both equities and commodities. Some observers said the Fed sees something about the U.S. economy that bears watching, and President Trump said he would keep tariffs in place on $250 billion worth of Chinese goods until it’s clear that Beijing is complying with any trade deal that is reached. Then a Brazilian ag official poured cold water on President Trump's trade wins with Brazil. Spring... you gotta love it, but we have again learned bugs come with it.
     Look on the bright side: Despite the threat of sustained tariffs, Trump said prospects for a deal were “coming along nicely.” Some observers say Trump's hold off on lifting tariffs comments were simply a negotiating strategy ahead of U.S./China trade talks in Beijing next week. While Trump's comments dim hopes of an agreement soon, analysts still think a deal is more likely than not as Trump would not want to risk weakening the American economy ahead of next year’s election.
     This just in... Special Counsel Robert Mueller is expected to release his report on Russian meddling in the 2016 U.S. presidential elections in the coming days. Whoops... that was also a headline a few months ago.


U.S./China trade policy update:

  • Later rather than sooner in the world of President Trump means a lot later, at least when it comes to the U.S. lifting of tariffs against China. That is the gist of the president's Wednesday comments about ongoing trade talks with China. As usual, the president mixed upbeat news (“talks are going well”) to hurdles ahead (no quick lifting of U.S. tariffs). “We're not talking about removing them,” Trump said of the tariffs. “We're talking about leaving them and for a substantial period of time, because we have to make sure that if we do the deal with China, that China lives by the deal.”
  • Waiting on China's response. Trade negotiations are a give-and-take affair. So observers say it will be more than interesting to see what China's reactions is to President Trump's keep-the-tariffs on approach, even as China as reportedly pledged to some significant changes in the trade relationship. Beijing has resisted implementing a verification mechanism that would allow the U.S. to act unilaterally, for instance with more tariffs. Trump suggested on Wednesday that prolonging the tariffs could be a way to hold Beijing accountable.
  • Trump commented on China trade in his Ohio stop Wednesday, saying, "We're so far down, it's got to be a great deal. If it's not a great deal, you never catch up," Trump said.
  • Are the latest Trump comments another negotiating strategy? Some observers think so. The president’s comments come as the countries are preparing for a fresh round of face-to-face negotiations, which include details on the tariff rollback. Administration officials have talked of removing tariffs in stages, as Beijing shows it has carried out parts of a deal. U.S. negotiators have been more willing to roll back at least some of the 10% tariffs on $200 billion of Chinese goods that took effect in September, but they are resisting removing the 25% on $50 billion of Chinese goods added in two stages last summer.
  • Politico said the talks next week in Beijing are a formality as China wanted an equal number of talks to be held in each country.
  • China confirmed the coming trade talks, with the Commerce Ministry announcing that Lighthizer and Mnuchin would be in Beijing for talks March 28-29, and that Chinese Vice Premier Liu He would travel to Washington in early April for more talks, according to Commerce Ministry spokesman Gao Feng. However, there are no reports of China responding to the comments from President Trump on U.S. tariffs.
  • A U.S. Chamber of Commerce official, briefed on the progress of the talks, said recent conversations between top U.S. negotiator Bob Lighthizer and his counterpart in China, Liu He, the Chinese vice-premier, focused heavily on a verification mechanism. The two spoke twice last week over the phone. “On enforcement, they spent a lot of time on that,” the chamber official told reporters, adding that the issues of tariffs and enforcement were closely linked.

Nebraska governor's price tag for flood damage $1.3 billion, and growing. Nebraska GOP Gov. Pete Ricketts detailed more than $1.3 billion in damage to the state’s infrastructure, agriculture, businesses and homes from severe flooding across parts of the farm belt. The details were submitted in an emergency request to Washington seeking a major disaster declaration and federal aid after last week’s “bomb cyclone” winter storm brought heavy rain and snow, followed by catastrophic flooding.

The details: Besides $400 million in projected livestock losses and $440 million in crop losses, Nebraska is facing more than $439 million in infrastructure damage to roads, railways, bridges and more, and $85 million in damage to thousands of private homes and businesses, Ricketts said during a news conference with state officials.

USDA Sec. Sonny Perdue said Tuesday that federal aid for Nebraska and other flooded states like Iowa could be included in a broader disaster relief bill currently working its way through Congress.

Brazil ag minister calls U.S. efforts on beef 'insufficient.' The U.S. commitment to send a team from USDA's Food Safety and Inspection Service (FSIS) to Brazil is a move in the right direction, but Brazilian Agriculture Minister Tereza Cristina Dias told Reuters in New York, "This is really not a concession, it is a technical issue... I do not consider it an exchange."

She also made clear that the tariff-rate quota (TRQ) for 750,000 tonnes of wheat imports duty free into Brazil was a global TRQ, not available only to the United States.

As for Brazil sending a team of inspectors to the U.S. on pork, Dias said that no date for the visit had been set.

Regarding ethanol and sugar trade issues, Dias said the U.S. wanted to talk about the TRQ for U.S. ethanol that expires in August. But Brazil wanted to link the matter to increasing its access to the U.S. market for sugar, something Dias said the U.S. was not ready to discuss. "That is why we did not progress," she noted.

Argentina in consultations with Brazil over wheat TRQ. The announcement by Brazil and the U.S. that Brazil would open a 750,000-tonne tariff-rate quota (TRQ) for imports of wheat from the U.S. and other global suppliers is raising concern in Argentina, typically the main supplier of wheat to Brazil. "Under Mercosur regulations, Brazil must request permission from Argentina, as the main supplier of wheat to the neighboring country, to carry out that operation," said CEC spokesman Andres Alcaraz. CEC is the organization representing Argentine grain exporting countries.

The Argentine government has also become involved, with their foreign ministry issuing a statement that they were giving "special attention" to the TRQ announcement. "The Argentine government has begun talks with Brazilian authorities and other Mercosur partners to analyze the impact and consequences that this measure could have on bilateral trade," the ministry said.

Reuters: EPA expected to issue partial RFS waivers to some small refiners. EPA is now expected to issue partial waivers of Renewable Fuel Standard (RFS) obligations to some of the 39 requests received by the agency from small refiners, according to sources quoted by Reuters.

The agency is aiming at deciding on pending small refiner waiver requests by the end of the month relative to the 2018 compliance year, the compliance-year deadline under the RFS. EPA has only granted one partial waiver of RFS requirements, the report said.

EPA spokesman Michael Abboud said, "EPA continues to implement the Renewable Fuel Standard program, including Small Refinery Exemptions, in accordance with the Clean Air Act, taking into consideration additional direction from Congress, recommendations from Department of Energy, and relevant court decisions." Under the process, the Department of Energy analyzes the requests for small refiner waivers and makes recommendations to EPA on whether a full or partial waiver should be granted.

EPA data as of March 14 indicated the agency has received 39 waiver requests for the 2018 compliance year, with 37 requests made for the 2017 compliance year. EPA granted 34 of the requests for 2017, with two still pending and one declared ineligible or withdrawn.

Background. Small facilities with a capacity of less than 75,000 barrels per day that can prove compliance would cause them significant financial strain can seek exemptions. Under the exemption process, the Department of Energy analyzes requests and makes a recommendation to the EPA on whether to grant full or partial exemptions, or deny it.

Canada is gaining as CPTPP continues and U.S. negotiations with Japan are still pending. Preliminary January import numbers released by Canada indicate the country has seen a rise in its beef shipments to Japan with the lower tariffs among countries in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Full trade data will be released March 27 for January, but initial data indicated Japan imported 60% more beef from CPTPP countries in January than they did one year ago. "We are just now getting the first results, and the preliminary indications are that year-over-year growth has been impressive," Canadian Minister for Trade Diversification Jim Carr told Politico. "The moment is particularly promising for Canada."

Under CPTPP, the tariff on beef shipments to Japan fell to 27.5% from 38.5% with another reduction of 1% expected April 1.

U.S. cattle industry officials are keenly aware of the situation. "I think we would be naive to think that [Japanese] importers aren't looking at a cost-ratio analysis," Kent Bacus, director of international trade and market access at the National Cattlemen's Beef Association, told Politico.

Beef is not the only product where Japan is expected to eventually turn to other suppliers like Canada given the more-favorable tariff terms under CPTPP. Montana farmers and those in the U.S. Northern Plains have said their Japanese buyers of wheat and barley are indicating that they will likely to turn to other sources — namely Canada — by mid-2019 because of more favorable pricing out of Canada for wheat and barley, the item noted. U.S. Trade Representative Bob Lighthizer has told lawmakers he is pushing for a quick resolution with Japan on trade issues, including agriculture, aiming to start those talks this month.

Other items of note:

  • Germany will meet its pledge to NATO allies to invest 1.5% of its GDP in defense by 2024. But German Chancellor Angela Merkel told the lower house of parliament that meeting the pledge “will require effort.”

  • USMCA confab at White House. The White House invited the House Republican whip team to meet with President Trump next Tuesday afternoon on the U.S.-Mexico-Canada Agreement (USMCA), Politico reported.

  • Which states are trending more Democratic, Republican? Despite persistently close presidential elections this century, many states have been becoming dramatically more Democratic or Republican compared to the nation over the course of the last decade and a half, notes the latest edition of Sabato's Crystal Ball. “Generally speaking, the Sun Belt and West are trending Democratic. The Midwest and North more broadly, along with Greater Appalachia, are trending Republican.” Link for details.

Markets. The Dow on Wednesday lost 141.71 points, 0.55%, at 25,745.67. The Nasdaq rose 5.02 points, 0.07%, at 7,728.97. The S&P 500 was down 8.34 points, 0.29%, at 2,824.23.

U.K. requests three-month Brexit extension. Ahead of a summit with European Union members this week, the U.K. asked to delay its departure from the bloc until June 30. But British Prime Minister Theresa May must first win backing next week from the U.K. Parliament for her Brexit deal. Meanwhile, Donald Tusk, the European Council president, favors a much shorter delay. Should the deal remain jammed, Tusk says an emergency summit could take place, probably to discuss a much longer delay to Britain’s exit — bringing with it a range of alternative outcomes, from a new deal negotiated by a different prime minister to no Brexit at all.

Fed signals rates will stay on hold amid growth fears. Officials indicated they are unlikely to raise interest rates this year, leaving its policy rate unchanged, between 2.25% and 2.5%, with a single rate increase in 2020 and none in 2021. In December, they expected two rate increases this year and another in 2020. Chairman Jerome “Jay” Powell cited mild inflation pressures, a sharp pullback in financial risk-taking and clear threats to U.S. growth in explaining the Fed’s wait-and-see stance. Growth appears to be slowing from last year, Powell said. That’s a result of the trade war, economic slowdowns in Europe and China and fading stimulus from the 2017 tax cuts. The central bank now expects 2.1% growth this year, down from its 2.3% forecast in December — and more than a percentage point less than the 3.2% the White House predicts. Sectors sensitive to interest rates like agriculture will likely find the latest forecasts to their liking, despite forecasts of an economic slowdown.

   As for the Fed's balance sheet, Powell noted the U.S. central bank will "slow the runoff of our assets starting in May, and to cease runoff entirely in September of this year," Powell said in his opening remarks. Later in the presser, Powell was asked to address the issue again and emphasized the runoff ends Sept. 30. The Fed has "had a lot of balance-sheet discussions," Powell observed. "We will stop it September 30." He added they do not know how long the halt in the balance-sheet runoff will last. "I would not put a time out there on that," he remarked. But he also made clear that the final decision on the mix of securities that will be in the Fed's balance sheet has not been made and it will likely end up somewhere around $3.5 trillion in size.

   Regarding the global economy, Powell noted struggles in several areas like Europe and China. But his assumption remains that China will stabilize, and he does not expect Europe to slide into a recession.

   Bottom line on the Fed developments: While some were surprised at the shift on the Fed, tea leaves have been evident this was coming. Data like retail sales —which Powell noted relative to the December result — and signs of struggling economies in Europe and China have been evident the past few weeks. And the comments from Fed officials have been nearly unanimous that patience was the current policy path. And, the U.S. economy in 2019 was already expected to not match the 2018 performance. Fed officials own projections bear that out.


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