Trump administration still expects to sign an initial trade deal with China next month
In today's updates:
* Chile cancels APEC summit; Trump spokesman says Phase 1 signing not impacted
Markets: The Federal Reserve on Wednesday cut interest rates for the third time this year. It said this was justified by uncertainty over the economic and trade policy outlook but signaled it does not expect to make a further cut in December, unless the economy slowed sharply. It reversed nearly all of 2018’s rate increases.
— U.S./China trade policy update:
- Chile cancels APEC Nov. 16-17 summit; U.S./China Phase 1 accord still on. Chile on Wednesday said it would not host an upcoming summit where President Donald Trump and Chinese leader Xi Jinping planned to meet and potentially sign Phase 1 of a trade accord between the two nations. The cancellation by Chile came as social unrest continued to rock Santiago. Organizers of the Asia-Pacific Economic Cooperation (APEC) summit indicated they had no plans to hold the event elsewhere. Reuters, citing sources familiar with the issue, said the U.S. intended to host Trump-Xi meetings in Alaska and Hawaii, while China has suggested Macau as a possible venue. Meanwhile, President Trump has expressed interest in visiting Australia for the Presidents Cup golf tournament that starts Dec. 9, which would put him in the region. A critical date is Dec. 15, when new U.S. tariffs on Chinese imports such as laptops, toys and electronics kick in.
- Chinese diplomatic observers and government advisers said the APEC cancellation had eased the pressure on negotiators from China and the U.S. to rush to strike a partial trade deal. A commentary by Taoran Notes, a social media account affiliated with state-run Economic Daily, said that the phone call on Friday meant the negotiations were not affected by “external factors,” and that the suggestion a deal could be signed in Macau was “groundless speculation.”
- The Trump administration insisted it would continue to press to finalize Phase 1 of the accord in the coming weeks. “We look forward to finalizing Phase One of the historic trade deal with China within the same time frame, and when we have an announcement, we’ll let you know,” White House spokesman Hogan Gidley said in an email.
- USDA Deputy Secretary Steve Censky comments on what's ahead: “I'm here in Accra, Ghana. But I will say that I do know that those discussions between the United States and China have been continuing this week to try to finalize that Phase 1 agreement. Everything is still all systems go for the United States and China to keep working to finalize that Phase 1 trade agreement as quickly as possible. And of course, we had the goal of having it finalized by mid-November for the APEC summit in Chile. But I think that goal of having it finalized by mid-November still remains.”
- Lead negotiators from U.S. and China will hold trade talks on the phone Friday. Lower-level officials from both countries have been in regular contact. China’s commerce ministry said in a statement the bilateral talks will continue to proceed as previously planned and the lead trade negotiators from both countries will speak by telephone on Friday. China’s foreign ministry spokesman Geng Shuang also said during a daily briefing today that President Donald Trump and Chinese leader Xi Jinping have maintained contact through various means about a bilateral summit for the trade deal, without elaborating. The U.S. and China are developing an enforcement mechanism that would include dispute settlement offices in both countries that could resolve concerns that arise. Also, Chinese officials have argued that all of the tariffs on $360 billion worth of Chinese imports should be rolled back as part of any deal.
- Treasury Secretary Steven Mnuchin said it will take time for Chinese purchases of U.S. agricultural goods to "scale up" to the $40 billion to $50 billion annual level touted by President Trump if the two sides can seal a Phase 1 trade deal. The $40 billion to $50 billion target is "a lot," he said in an interview with Reuters, but is based on "very specific discussions" of product purchase commitments by China. “This is built on a bottom-up basis of both what we think we can deliver and what they think they need,” Mnuchin said. “It’s a one-year target, but obviously it’s going to take some time to scale up.”
- Chinese officials unsure they could reach a comprehensive long-term trade deal with the U.S., according to Bloomberg. The news service, which frequently reports more negative news on the topic than some other media outlets, reported that, “In private conversations with visitors to Beijing and other interlocutors in recent weeks, Chinese officials have warned they won’t budge on the thorniest issues, according to people familiar with the matter. They remain concerned about President Donald Trump’s impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks.
- China’s National Bureau of Statistics data for the manufacturing sector suggested it shrank for a sixth successive month in October. China’s official manufacturing purchasing managers’ index fell to 49.3 in October, down from 49.8 the month before (any score below 50 points to contraction). A trade war with America and slowing domestic demand have hit Chinese manufacturing hard.
- Hong Kong protests force city into recession. The city's economy shrank 3.2% in the July-to-September quarter from the period just before, the worst quarter-to-quarter drop since 2009.
— China’s hunger for protein is causing big swings in global meat markets. The lifting of a four-year-old Chinese ban on U.S. poultry shipments sent stocks of producers such as Tyson Foods Inc. surging and chicken prices are expected to follow, the Wall Street Journal reports (link), signaling market hopes for a surge in exports. The U.S.-China accord comes as an outbreak of African swine fever has slashed some 40% of China’s hog herd, pushing domestic pork prices up by 69% from the prior year and setting off a hunt for alternative protein sources. China’s chicken imports are projected to more than double in 2020, according to USDA. “Ample U.S. poultry supplies have dragged down domestic prices, and American poultry executives are licking their chops at the opportunity to fill China’s pork gap with exports of dark-meat chicken,” the WSJ article noted. “Whether the United States is a direct supplier to China or whether they source from other countries…that creates backfill opportunities for us,” said Tyson Chief Executive Noel White.
— Nothing new surfacing on surface transportation bill. Senate Finance Chairman Chuck Grassley (R-Iowa) said he’s made little to no progress in developing a finance plan for the rewrite of federal surface transportation programs, reducing odds about whether the measure can advance to the Senate floor this year. “There’s nothing new since we came back in September,” Grassley told reporters yesterday when asked about the finance title that would be attached to the Senate Environment and Public Works Committee bill (S 2302) reported in July. Republicans’ plans to bring the highway bill to the Senate floor in November are in doubt, he added. “Obviously it can’t come if it isn’t financed,” Grassley said.
— Other items of note:
- CFTC reauthorization bill clears House Ag panel. The House Agriculture Committee approved, by voice vote, an amended 6-year reauthorization bill (HR 4895) for the Commodity Futures Trading Commission. The measure includes language for the CFTC to review exemptions given to foreign entities if the European Union continues to push for authority to regulate U.S. financial entities.
- House to vote on impeachment procedures. The vote today is on a resolution that would set rules for the public phase of an inquiry that has begun behind closed doors. While not a formal vote to open impeachment proceedings, it is being seen as a test of approval for the process.
- Fiat Chrysler and the parent company of Peugeot announced they have agreed to merge via a 50-50 share swap. It would create one of the world’s biggest automakers. "In a rapidly changing environment, with new challenges in connected, electrified, shared and autonomous mobility, the combined entity would leverage its strong global R&D footprint and ecosystem," the companies said in a statement. Combined, the two companies sell 8.7 million vehicles per year, generating nearly 170 billion euros, or $190 billion, in revenue and €11 billion in operating profit. That would make the new company slightly bigger than GM, trailing only Volkswagen, Toyota and the Renault-Nissan alliance in terms of vehicle production.
- Ford reached a tentative agreement with the United Auto Workers union on a new labor contract for its U.S. workers, likely avoiding a strike that cost its larger rival General Motors about $3 billion. The deal includes $6 billion in new investments from Ford and the creation and retention of more than 8,500 jobs.
— Markets. The Dow on Wednesday added 115.27 points, 0.43%, at 27,186.69 and is just 173 points away from its all-time high. The S&P 500 rose 9.88 points, 0.33%, at 3,046.77. The Nasdaq increased 27.12 points, 0.33%, at 8,303.98.
FOMC lowers rates, with Powell signaling a rate-cut pause is at hand. As expected, the Federal Reserve on Wednesday lowered the target federal funds rate by a quarter point, to between 1.5% and 1.75%. The cut, announced after a two-day policymaking meeting, follows a similar quarter point reduction in September. “Although household spending has been rising at a strong pace, business fixed investment and exports remain weak,” the post-meeting statement said, keeping a common thread in Fed descriptions of the U.S. economic situation over the past several months. The post-meeting statement noted that “uncertainties about this outlook remain.” The portion of the statement boosting expectations that a pause in rate cuts is in the offing were the comments about the strength of the U.S. economy and the lack of specifically pointing to trade uncertainty. “The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate,” the statement said. But Fed Chairman Jerome Powell in his post-meeting press conference signaled that the rate cuts have likely run their course. “We believe monetary policy is in a good place to achieve these outcomes,” Powell said relative to the Fed’s “outlook of moderate economic growth, a strong labor market, and inflation near our symmetric two-percent objective.” He reiterated the view that the Fed will monitor developments that “cause a material reassessment of our outlook we would respond accordingly. Policy is not on a preset course.” Powell also indicated that the risks appear to be headed toward the positive side. When asked to clarify whether that involved trade, Powell confirmed it did. “We have that Phase 1 potential agreement with China which, if signed and put in to effect, could have the effect of reducing trade tensions and producing uncertainty. And that would bode well we think for business confidence and perhaps activity over time.” So getting that phase one deal in place “has the potential for improvement in the risk picture,” Powell said.
The CME FedWatch tool indicates odds for no change in rates at the December FOMC meeting stand at over 80% in the wake of Powell’s press conference.
Bank of Japan leaves rates steady; signals potential for rate reduction. The Bank of Japan (BOJ) did not adjust its monetary policy at the conclusion of their meeting today, but they sent a clear signal a rate cut could be in the outlook. The BOJ altered their forward guidance on policy to indicate they expected to keep rates at their current level or reduce them, a shift from their prior wording that indicating they would keep rates low until next year without any indication that lowering rates was possible. “We made it clear by our new forward guidance for interest rates that we are conducting monetary policy with an easing bias,” said BOJ Governor Haruhiko Kuroda. The Japanese central bank may also be open to other options beyond rate cuts, he noted as his post-meeting press conference. The US central bank appears to potentially once be moving out of step with other major global central banks on monetary policy.
More than 172 million Americans plan to celebrate Halloween this year and are expected to spend about $8.8 billion on the holiday, according to the National Retail Federation (NRF). That's the third-highest figure in the survey's 15-year history, after the record $9.1 billion set in 2017. "We are seeing a noticeable increase in consumers whose Halloween purchases are inspired by their friends, neighbors and even celebrities on social media," NRF President and CEO Matthew Shay said. "Retailers expect to have another strong Halloween season and have stocked up on candy, decorations and the season’s most popular costumes."
For the first time, there are more individuals in China than in the U.S. who are in the top 10% of global wealth, according to a Credit Suisse report (link). That is mostly due to the sheer size of China’s population, but it doesn’t reflect the majority: The country’s urban upper middle class is a huge consumer force, but in much of China per capita GDP remains below the global average.