Mexico First to Ratify USMCA; Trump Hosts Canada's Trudeau Today

Posted on 06/20/2019 6:43 AM

Iran shoots down U.S. drone near Strait of Hormuz; oil prices spike

Mexico on Wednesday ratified the USMCA, but it is unclear when the U.S. Congress might do the same, with most expecting Canada to move on the pact before.
     Iran shot down a U.S. naval surveillance drone near the Strait of Hormuz, Iranian and U.S. officials said today, adding to tensions in the Persian Gulf region. Iran’s Revolutionary Guard Corps said that it targeted the drone inside Iranian airspace over the southern province of Hormozgan, next to the Strait of Hormuz. A U.S. official confirmed the incident and said that the drone was shot down by an Iranian surface-to-air missile over international airspace in the Strait of Hormuz. Oil prices spiked overnight, with WTI crude soaring 3% to over $55/bbl. Key now is how the U.S. responds.
     Trump hosts Canada's Justin Trudeau at the White House. The leaders are expected to discuss ratifying a revised trade deal, and whether the U.S. can assist with the release of two Canadians held in China. Canada has been caught in the middle of U.S./China tensions after detaining Huawei CFO Meng Wanzhou in December.
     Xi Jinping arrived in North Korea; his two-day visit marks the first time a Chinese leader has set foot in the country in 14 years. In his meeting with Kim Jong Un, Xi is expected to try to help move diplomacy along relative to North Korea's nuclear program.
     Trump/Xi meeting unlikely to resolve trade differences, could lead to more talks. Upcoming trade talks between the leaders of China and the U.S. are unlikely to immediately resolve major disagreements between the two sides but could start a new phase in negotiations, Chinese state media said today. Meanwhile, China is “rolling out the red carpet for the rest of the world” by lowering tariffs with other countries — even as its trade war with the U.S. continues to drag on, according to Peterson Institute for International Economics.
     The Fed as expected left interest rates unchanged, but hinted they would cut rates in the months ahead if the outlook weakens. “The committee felt that the right thing to do was to wait and see,” Jay Powell, the Fed’s chairman, said at a news conference yesterday. The central bank will pay particular attention to developments in the trade war with China and whether wages continue to mostly stagnate. The Fed dropped a reference to being “patient” on rates and forecast a larger miss of their 2% inflation target this year in its statement on Wednesday. Meanwhile, Powell pushed back on the idea President Trump might demote him — “I think the law is clear that I have a four-year term, and I fully intend to serve it,” Powell said at a news conference. As for market impacts, the yield on the benchmark 10-year Treasury dropped below 2% overnight for the first time since November 2016. The Fed news is boosting U.S. stock futures premarket, with the Dow indicating gains of ovr 200 points at the open and the Fed Funds Futures pointing to a 100% chance of monetary policy easing in July.


Mexico ratifies the USMCA. Mexico on Wednesday ratified the U.S.-Mexico-Canada Agreement (USMCA), with Canada expected to follow and the U.S. showing signs it will take up the matter later this year. Mexico's Senate approved the trade pact by 114 votes to four, with three abstentions.

On Wednesday evening President Trump tweeted: “Congratulations to President Lopez Obrador — Mexico voted to ratify the USMCA today by a huge margin. Time for Congress to do the same here!”

The Trump administration is hoping for a compromise with House Speaker Nancy Pelosi (D-Calif.) to enable ratification before the August recess, a timeline most conclude is too optimistic. But at least one senator, Chuck Grassley (R-Iowa), thinks the August target can be reached. Asked if the August timeline was still possible, Grassley responded with a single word: “Definitely... I definitely get the feeling that Pelosi just needs time to get these issues worked out, but more importantly time to make sure that a lot of new members of the House of Representatives are comfortable with it,” Grassley told reporters. “We’re just going to have to have patience until she gets it done.” Pelosi has named a task force of House Democrats to discuss concerns over labor standards, environmental provisions, drug pricing and enforcement.

Meanwhile, Trump today will host Justin Trudeau, Canada’s prime minister. Canada has yet to set a date for USMCA ratification. Trudeau could signal a ratification timeline in comments today.

Highlights of USTR Lighthizer's comments Wednesday to House Ways & Means panel:

  • China: A U.S/China trade deal remains “a big if.” He added that both he and Treasury Secretary Steven Mnuchin will meet with Chinese officials in Osaka, Japan to lay the groundwork for the Xi/Trump summit. Lighthizer said he also has "a conversation set up with my [Chinese] counterpart on the telephone” ahead, adding he expects to meet with him and Mnuchin in Osaka before discussions between Trump and Xi take place. "When actual negotiations begin again, I can't say at this point, but we're talking, we're going to meet," Lighthizer observed.
  • Japan: Because of Japan’s trade deal with the European Union and its membership in the Trans-Pacific Partnership (CPTPP) "we are going to be treated worse than our competitors,” Lighthizer said. “We understand the nature of this problem and our farmers are going to lose that market.” Regarding a timeline for reaching a deal with Japan, Lighthizer said: “I am hopeful we will have something resolved in the weeks and months ahead.”
  • USMCA: Failure to approve USMCA would be a major misstep, Lighthizer warned. "Right now, we are going to have a catastrophe if this doesn't pass. You are not going to have labor enforcement. There are tens of millions of jobs at stake," he told lawmakers. USMCA approval has other implications too, Lighthizer stressed. "If we are in a position where we literally cannot pass this agreement, what does that say about our resolve to have a fair-trading system?" he observed, noting China and others will be watching the issue closely.
  • Litmus test for new trade agreements: Unless a trade deal with a foreign country is going to make some farmer, rancher or company in the United States “a little bit richer,” it probably isn’t worth the bother, Lighthizer said in response to a question about negotiating a free trade agreement with Switzerland. Lighthizer acknowledged the Trump administration was “exploring” the idea. The Republic of Georgia has also expressed interest in a trade pact with the U.S. “When I’m asked about this, I always say to myself, ‘Tell me what more we’re going to sell you, right?’ I want to know why this is going to make somebody, somewhere in America … a little bit richer. If it doesn’t do that, it’s probably not worth my time,” Lighthizer said.

Mixed tone out of China ahead of trade talks. While welcoming talks between the U.S. and China, statements and newspaper editorials from the country are making clear that from their perspective, coming discussions on trade between the U.S. and China need to be approached in a certain way. "The heads of the two trade teams will communicate, according to instructions passed down from the two presidents," Gao Feng, Chinese Commerce Ministry spokesman, told reporters. "We hope (the United States) will create the necessary conditions and atmosphere for solving problems through dialogue as equals." He stated that there are three keys to the coming talks — the removal of additional tariffs, trade purchases and a balanced text for the deal. Gao labeled those as “matters of principle” that cannot be compromised.

"China's principles and basic stance on Sino-U.S. economic and trade consultations have always been clear and consistent, and China's core concerns must be properly resolved,” he stated.

The China Daily newspaper stated in an editorial it appeared both sides were ready for “serious dialogue” and that one meeting was not going to result in a resolution, noting that "it would be expecting too much to anticipate one single meeting will wrap everything up. The two parties' expectations are too divergent to allow that," the paper said. "More likely than not, the one-on-one meeting will end up being the start of a new phase in the negotiations with the two leaders personally setting out their country's respective bottom lines."

The Global Times struck a more contentious tone, saying the country can “never be daunted.”

National Corn Growers Association launches advertising campaign on RFS waivers. The ad, airing on Fox News in Washington D.C., calls on the Environmental Protection Agency to halt “special favors to oil companies” and “stop betraying President Trump’s commitment to farmers.” The ads began airing today and will continue into next week. Federal law authorizes the EPA to issue exemptions for small refineries facing a “disproportionate economic hardship,” and ethanol proponents argue the administration has handed out the waivers too freely.

Other items of note:

  • Iran shot down an American drone which it said had entered its territory, ratcheting up already tense relations between the countries. The commander of Iran’s Revolutionary Guard said that the action sent a “clear message” to the White House. The Pentagon confirmed that one of its drones had been shot down, but said it was outside Iranian airspace. The incident highlights rising tensions between the two countries in the wake of attacks on oil tankers in the Gulf of Oman.

  • Xi Jinping, China’s leader, arrived in Pyongyang to meet Kim Jong Un, North Korea’s dictator. The two are expected to discuss North Korea’s nuclear program. Xi is expected to ask Kim to refrain from provocations and to restart disarmament talks.

  • If the Trump administration and Congress fail to reach a spending agreement, the White House will offer a continuing resolution to avoid a government shutdown and keep agencies funded at current levels for a year, said Treasury Secretary Steven Mnuchin.

  • Trump to win 2020 contest by a single electoral vote? Cook Political Report's Dave Wasserman tweets that a very possible 2020 scenario finds Democrats flipping Michigan and Pennsylvania, increasing their stronghold in California, and narrowing the loss in Texas — helping Dems win the popular vote by nearly 5 million votes. But Trump is could narrowly hold onto Arizona, Florida, North Carolina and Wisconsin — which Democrats are gunning for — and keep the White House by a single electoral vote. (Link)

Markets. The Dow on Wednesday gained 38.46 points, 0.15%, at 26,504.00. The Nasdaq advanced 33.44 points, 0.41%, at 7,987.32. The S&P 500 moved up 8.71 points, 0.30%, at 2,926.46.

The Federal Reserve on Wednesday kept rates steady but opened the door to a future cut if risks to economic growth intensify. Fed Chairman Jerome “Jay” Powell stressed that new information between now and July 31, the date of the next meeting of the Federal Open Market Committee (FOMC), would be crucial to monetary policy. Besides traditional economic data, this will include the outcome of a meeting at the G20 summit in Japan late this month between President Trump and Xi Jinping, the Chinese president, aimed at resolving trade tensions. “We felt it would be better to get a clearer picture of things and that we will learn a lot more about these developments in the near term,” Powell said. “Ultimately, the question we will be asking ourselves is: 'Are these risks continuing to weigh on the outlook?’” Eight of the 17 Fed officials are predicting lower rates this year, according to charts released alongside the policy statement. Powell said that the case for easing had strengthened even among the other officials. “We will act as needed, including promptly if that’s appropriate, and use our tools to sustain the expansion,” he said. Fed officials said U.S. economic activity was rising at a “moderate” rate, rather than a “solid rate.” But they are still expecting growth of 2.1% this year and 2% in 2020.

Investor purchases of U.S. homes climb to all-time high. Big private-equity firms, real-estate speculators and others that buy properties comprised more than 11% of U.S. home purchasers in 2018. That marked the highest level of investor ownership on record, and nearly twice the share that they had before the 2008 housing crash.

Union Pacific (UP) Corp. believes the U.S. economy is fundamentally healthy even if freight rail demand isn’t. UP Chief Executive Lance Fritz says the freight railroad’s shipping volumes are “down about 4%” this quarter, the Wall Street Journal reports (link), with harsh weather in the Midwest and uncertainty over trade undercutting the carload business. Fritz says he sees the concerns shippers have on trade issues in restocking and inventory decisions customers are making. The railroad is a major carrier for container business from Asia to the U.S. West Coast, but Fritz says it remains too early to tell how much retailers will import during this year’s peak season. Railroads face a more immediate concern with declining demand for industrial commodities that move by carload and with sliding intermodal traffic as truckers cut prices to fill trucks amid weakening demand, the article noted.

Bank of England cuts growth forecast as rates kept on hold. The Bank of England expects economic growth to drop to zero in the second quarter as it kept interest rates on hold at 0.75%. Unlike the European Central Bank and the Federal Reserve, which this week both signaled a willingness to consider lower interest rates, the bank’s Monetary Policy Committee continued with its previous guidance. The committee said that its consensus view was that further rate rises were likely to be required “at a gradual pace and to a limited extent,” adding that “underlying growth in the UK appears to have weakened slightly in the first half of the year relative to 2018 to a rate a little below its potential.”


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