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Media reports are trying to predict what will happen when President Trump and Chinese leader Xi Jinping meet Saturday for 90 minutes in Osaka, Japan. But those predictions, including ones from Bloomberg and Reuters, are all over the map. Bottom line: no one knows how the session will unfold. Meanwhile, Chinese consumers are becoming cautious, the Wall Street Journal reports, which “could weaken President Xi’s hand” during talks with Trump, but “he will also be anxious not to appear weak to his citizens.” The newspaper's conclusion: “If the talks go well, expect the stock markets to celebrate; if they go badly, expect the outlook for the global economy to darken in the second half of the year.”
— U.S./China trade policy update:
- Liu, Lighthizer and Mnuchin heading to Osaka, Japan soon to pave the way for Trump/Xi confab scheduled for 90 minutes Saturday, the second day of the summit, around noontime on the sidelines of the Group of 20 meeting in Osaka, Japan, according to a U.S. official. Both sides are expected to have lists of disagreements and possible concessions. “The relationship has held steady and strong, so therefore you’re likely to see an agreement to resume negotiations,” a senior White House official said this week — declining to speculate on anything beyond that.
- Mnuchin: U.S./China trade war deal ‘90% complete.' Treasury Secretary Steven Mnuchin said a trade deal between China and the U.S. was 90% completed, “and there's a path to complete this.” The comments come ahead of a meeting between the two countries’ leaders at the G20 summit on Saturday. In an interview with CNBC, Mnuchin said: “I think this is going to be a very important G20.” He added that “the message we want to hear is that they want to come back to the table and continue because I think there is a good outcome for their economy and the U.S. economy to get balanced trade and to continue to build on this relationship.” Mnuchin said he is also hopeful an agreement could be struck by the end of the year but said "there needs to be the right efforts in place." Mnuchin, who has been a key negotiator along with U.S. Trade Representative Bob Lighthizer, said Chinese President Xi Jinping and President Donald Trump had a “very close working relationship” but there needed to be “the right efforts in place” for a finalized deal.
- Senate Finance Chairman Chuck Grassley (R-Iowa) does not expect a major breakthrough when Trump and Xi sit down Saturday. “He’s not the negotiator,” Grassley said. “He's the John the Baptist, going ahead of all the people who make the changes.” Grassley expects Trump is “going to set the stage for the continuation of — hopefully the successful continuation of — talks with China.”
- “China’s principles are as follows: mutual respect, treating each other as equals, win-win outcomes, working together, and also respecting the rules of the WTO,” China Vice Commerce Minister Wang Shouwen said this week.
- China’s top financial regulator played down the impact of U.S tariffs on the Chinese economy, saying it was “very limited” and could even backfire on the United States. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, the country’s banking watchdog, said previously that the U.S. would “pay a huge price” for the ongoing trade conflict, including losses in exports China, costs to consumers and importers, lost income for hi-tech firms, and damage to the US dollar-led global financial system. “The U.S. can no doubt increase tariffs on us to the extreme, but this will have very limited impact on the Chinese economy,” he wrote in a commentary in Communist Party mouthpiece People’s Daily. “By contrast, the U.S. itself will be hit to almost the same degree. The goal for the U.S. in raising tariffs is to decrease the trade imbalance between China and the U.S., but because of Chinese countermeasures, the direct result has become uncertain and the [US action] could ... even backfire.” Guo is also the central bank’s top party official.
- Guo also said U.S. claims about Chinese cybertheft, state dominance of the economy, and opaque corporate governance had “absolutely no standing.” He argued that China was a “staunch defender” of intellectual property rights, that the Chinese government had created a “level playing field” for private companies, and that private enterprise operated independently of the party. “The corporate governance principles and framework of Chinese enterprises have been consistent with international standards, and have been adapted for our national conditions, in line with international practices,” he said. “It is said that China provides huge subsidies for its exports and manipulates the exchange rate, and there has been criticism that China has not opened up its market, but there has been no strong evidence and many claims are contradictory.”
- Chinese think tank researcher comments on U.S./China trade talks ahead. The Academic Centre for Chinese Economic Practice and Thinking, a think tank at Tsinghua University in Beijing, is led by David Li Daokui. According to the South China Morning Post, Li said both Xi and Trump had the political will to reach a trade agreement, or at least a temporary deal, but warned that Washington needed to learn from last month’s breakdown in negotiations. “Their legal focus outweighed the strategic thinking, and there was an overemphasis on legal terms and punishment clauses,” he said. “It will damage the atmosphere if they continue to be preoccupied with these clauses – it’s not the Chinese way of thinking.”
- Chinese bank tied to North Korea could lose access to U.S. A U.S. judge has found three large Chinese banks in contempt for refusing to comply with subpoenas in an investigation into North Korean sanctions violations, the Washington Post reported (link). The order triggers for the first time a provision that could cut off one of China’s largest banks from the U.S. financial system at the demand of the U.S. attorney general or treasury secretary. “The three banks are not identified, but details in court rulings align with a 2017 civil forfeiture action in which the Justice Department alleged that China’s state-owned Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank worked with a Hong Kong front company accused of laundering more than $100 million for North Korea’s sanctioned, state-run Foreign Trade Bank.”
— The Justice Department has intervened in a class-action lawsuit that accuses huge chicken producers, including Tyson Foods and Pilgrim’s Pride, of price-fixing. The Justice Department asked the federal court overseeing the case to halt the discovery process for six months as it pursues a criminal investigation. The lawsuit was filed by Maplevale Farms, which claims that big producers had colluded to “fix, raise, maintain, and stabilize” the price of broiler chickens, which account for 98% of all the chicken meat sold in the U.S. The lawsuit alleges that the chicken companies shared unusually detailed information with the data service Agri Stats, on everything from the age of breeder flocks to monthly operating profits.
From 2008 to 2016, the wholesale price of broiler chicken increased by 50%, even as the main costs of chicken breeding — corn and soybeans — fell significantly, the lawsuit alleges.
Representatives for the chicken producers denied the allegations or declined to comment.
— Group: Long-term debt is “out of control.” The Congressional Budget Office (CBO) released its Long-Term Budget Outlook Tuesday, which warns that today’s high levels of debt are on course to nearly double as a share of the economy over the next 30 years, from 78% of GDP today to 144% by 2049 under current law. Debt would rise to 219% of GDP by 2049 if various expiring policies are continued. The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget:
“Another year has passed and Congress has done nothing to address our rapidly rising debt, which will reach a new record as soon as 2030 and double as soon as 2040. Even under current law, debt will grow faster than the economy indefinitely, and we will spend more on interest payments on the debt than the entire discretionary budget by 2046. Imagine spending more to service past decisions than to protect the country and invest in the future.
“CBO estimates that fixing the debt would increase income per person by $5,500 a year, lower interest rates, increase space for public investment, and reduce the risk of a fiscal crisis. (Link to CBO report.)
“But instead of taking advantage of our economic strength to slow rising debt, policymakers have made it worse by cutting taxes and increasing spending. And they seem intent on continuing their borrowing binge. Each day seems to bring a new trillion-dollar idea but few ways to pay for the cost.
“Enough is enough. Policymakers need to start taking our long-term budget outlook seriously. If they don’t, their children and grandchildren will have to.”
— U.S. pork producers want streamlined reviews for GMO pork. U.S. pork producers want to ease regulation of genetically engineered livestock following an executive order President Donald Trump issued earlier this month instructing federal agencies to speed up approval of new agricultural biotechnology. The National Pork Producers Council (NPPC) is seeking White House intervention to reverse a Food and Drug Administration (FDA) stance that genetically edited animals should be regulated like drugs and barred from entering the food chain until the modifications are shown to be safe, according to Bloomberg.
NPPC wants USDA to be the lead oversight agency, noting regulatory hurdles risk giving a competitive edge to more permissive countries, including Brazil, Argentina, Canada and China.
“We are looking for leadership from the White House to reconvene talks,” Dan Kovich, the group’s director of science and technology, told reporters on a conference call. “There are other legitimate, viable regulatory pathways.” U.S. regulatory concerns could slow introduction of an experimental gene-editing technique to make hogs resistant to porcine reproductive and respiratory syndrome virus, Kovich said.
Trump’s June 11 executive order instructs USDA, the FDA and the Environmental Protection Agency — all of which have jurisdiction over genetically engineered agricultural products — to review their biotechnology regulations to streamline the approval process.
USDA has already proposed a broad overhaul of biotech rules that would exempt from regulation genetically edited farm products with traits “similar in kind” to modifications that could be produced through traditional breeding techniques.
— USMCA update. Members of a working group appointed by House Speaker Nancy Pelosi (D-Calif.) met Tuesday afternoon with U.S. Trade Representative Bob Lighthizer to discuss drug pricing provisions in the proposed replacement for NAFTA, Ways and Means Trade Chairman Earl Blumenauer (D-Ore.) said.
Blumenauer said Congress should be able to ratify the U.S.-Mexico-Canada Agreement (USMCA) by the end of the year. While issues important to Democrats must be addressed, the lawmaker said he recognizes that Mexico’s newly elected president and the country will suffer if the U.S. takes too long to approve the agreement. “I think there’s no interest on the part of our leadership … to have this bleed into 2020,” Blumenauer said. “Our hope is that we can move with dispatch, get our concerns resolved, strengthen the agreement and move forward.”
Meanwhile, Blumenauer will speak this morning at an event hosted by the Washington International Trade Association on the congressional trade agenda and potential passage of the USMCA.
— Grassley sees U.S. trade deal with Japan shortly after July elections. Senate Finance Chairman Chuck Grassley (R-Iowa) said Tuesday he expects an agricultural trade agreement with Japan to be announced “soon after” the Japanese elections next month. The deal could actually be finalized before then, but the announcement would be postponed until after the elections, Grassley told reporters.
— USDA leaves overall food price inflation forecasts unchanged despite shifts within products. U.S. food price inflation is still forecast at 1.5% to 2.5% for 2019, according to USDA’s Economic Research Service, unchanged from its previous outlook.
Food at home (grocery store) prices are still seen rising 0.5% to 1.5% with food away from home (restaurant) prices seen rising 2.0% to 3.0%. The 2019 grocery store price forecast reflects the possibility for a fourth straight year with either food price deflation or food price inflation that remains well below historical averages.
Compared to May, USDA raised its forecast range for pork prices to a fall of 0.5% to a rise of 0.5%, up from May when they forecast those prices to fall from 1.0% to 2.0%. “China's African Swine Fever (ASF) has not dramatically affected retail prices at this time,” USDA noted, adding that they expect a “strong increase in domestic demand” to keep lifting retail pork prices the second half of this year.
Beef prices, however, are now expected to be up 1.0% to 2.0%, down from a forecast range of 2.0% to 3.0% in May.
USDA also trimmed its price expectations for eggs, dairy products and poultry compared to May forecasts. On poultry, USDA said the “unusually weak” prices earlier this year and weak domestic demand were factors in the downward adjustment to the forecast.
While overall food prices were up 2.0% in May from year-ago levels, restaurant prices were up 2.9% while grocery store prices were up 1.2 percent. USDA typically makes adjustments each month to several food categories, but normally any changes to the headline numbers come in July and November. That sets the stage for the all food, grocery store and restaurant price outlooks to potentially be revised next month. But, grocery store prices are still expected to remain well below the 20-year average of increasing 2.0%.
— House approves border funding plan. The House Tuesday approved a $4.5 billion package funding food, water and shelter for those entering the southern border of the U.S. on a largely party-line vote of 230 to 195 — four Democrats voted against the bill while three Republicans supported it. The Senate has not approved their version but is expected take up its version of the package yet this week.
The House version puts restrictions on the use of the funds while the Senate version is expected to contain more funding for enforcement staff at Immigration and Customs Enforcement, something not in the House plan.
The White House indicated it would recommend a veto of the House version. The Senate version was approved by the Senate Appropriations Committee on a 30-to-one vote.
— Other items of note:
USDA's Office of Inspector General is evaluating whether USDA concealed information and used flawed data to develop and promote a new hog inspection system that would shift many food-safety tasks from federal inspectors to pork industry employees. USDA’s inspector general, Phyllis Fong, notified 16 members of Congress on Friday that her office has launched the probe in response to concerns the lawmakers raised in March, according to a letter obtained by the Washington Post. Link for details.
USDA Secretary Sonny Perdue told CNN that he believes human-caused climate change is just a result of changes in weather, stating: "You know, I think it's weather patterns. ... It rained yesterday, it's a nice pretty day today. So the climate does change in short increments and in long increments."
EPA: Politico misleads on Trump EPA’s progress cleaning up superfund sites. The Trump administration's EPA has “made it a priority to speed up the Superfund process to cleanup sites and return land to productive use," EPA said in a release. The Office of Inspector General (OIG) stated that the agency’s efforts "complied with applicable laws and rules" while also highlighting that they "heard positive feedback from task force members, such as it was a collaborative process or a helpful effort." EPA said it was "pleased that the OIG and others approve of the efforts of the career staff who helped establish and carry out the goals of the Superfund Task Force, because we are making great progress for the American public." It noted that "a reader of Politico would have been rightfully confused about the results of this inquiry from OIG. It is only fair to ask why they chose to ignore the key findings of this report,” EPA said, adding “EPA deleted all or part of 22 sites from Superfund’s National Priorities List in FY 2018 — the largest number of deletions in one year since FY 2005.”
Trade policy survey. Peterson Institute for International Economics presents the University of Maryland’s survey of 2,993 voters on trade-related topics today.
USTR details plans to reallocate tariff rate quotas for sugar imports to try to make more product available to U.S. processors and food companies (link). USTR is switching about 100,000 tons (out of a total of about 1.1 million) to countries like that have the supplies to ship the sugar. The Sweetener Users Association welcomed the reallocation but said USDA should increase the overall TRQs either for Mexico or the separate quota for the rest of the world. Sugar users previously urged a quota increase of 400,000 tons. USTR did not address this request in its Federal Register notice, and some industry participants criticized the agency for not releasing a timely press release on the reallocation.
Agriculture and climate change. At one of the Central Valley’s biggest commercial nurseries — one of the largest in the world — tiny trees are being subjected to the kinds of stresses those crops are facing outside: declining water, escalating salt. It’s part of a reckoning in agriculture over climate change. Link to article in Bay Nature.
How Democratic presidential candidate Elizabeth Warren says she will pay for her policy ideas. Since launching her presidential campaign, Warren has unveiled a domestic platform that, so far, her campaign estimates would cost a combined $3 trillion over 10 years — plans that include canceling student debt for almost every American, building 3 million affordable housing units, reducing rents by 10% nationwide, shrinking the black-white wealth gap by 4 percentage points, subsidizing child-care for all young families, offering universal prekindergarten, providing universal opioid treatment and eliminating the National Park Service’s maintenance backlog while making all national parks free.
— Markets. The Dow on Tuesday fell 179.32 points, 0.67%, at 26,548.22. The Nasdaq dropped 120.98 points, 1.51%, at 7,884.72. The S&P 500 lost 27.97 points, 0.95%, at 2,917.38.
Markets remain convinced a rate cut is coming in July. The July 30-31 Federal Open Market Committee (FOMC) meeting is still expected to result in a reduction in the target range for the Fed funds rate from the current 2.25% to 2.5% level. However, comments from St. Louis Fed President James Bullard Tuesday to Bloomberg that a 50-basis-point reduction would be excessive weighed on equity markets — Bullard cast the lone dissenting vote at last week’s FOMC when the central bank kept rates steady. Bullard indicated he backed a 25-basis-point trim this month. Fed Chairman Jerome Powell said in New York that the Fed would lower rates if data showed a sustained downward trend for the economy. While equity markets fell Tuesday, it has not significantly reduced market expectations on interest rates. The CME FedWatch before trading opened today (Wednesday) showed a 26.1% expectation for a 50-basis-point cut at the July FOMC session and a 73.9% expectation for a 25-basis-point trim. One week ago, those percentages were at 64% for a 25-basis-point cut and 33.5% for a 50-basis-point trim. The comments from both Bullard and Powell really do not reflect a shift from their positions last week but run counter to market hopes for a big move by the Fed. Plus, the Fed is not watching economic data alone but also the U.S./China trade situation. And that remains somewhat uncertain ahead of the weekend session between President Donald Trump and Chinese President Xi Jinping.
Global conditions might make a cut necessary, Fed Chairman Jerome Powell said. Economic “crosscurrents have re-emerged, with apparent progress on trade turning to greater uncertainty,” he told the New York Times' Neil Irwin. But he stopped short of guaranteeing it, saying the Fed would be watching how economic events — like Trump’s planned meeting with President Xi Jinping of China at the Group of 20 summit meeting this week — unfold. Meanwhile, president of the St. Louis Fed, James Bullard, said that he would back a reduction of 0.25 percentage point, rather than the 0.5 percentage point cut anticipated by some investors.
WTO says trade restrictions are holding back the global economy. The World Trade Organization warned that a spike in trade restrictions by major nations is threatening to hold back the global economy. Trade coverage on imports among Group of 20 countries — including tariffs, import bans and new customs procedures — topped $336 billion between October and May, the organization said in a report. That’s the second-highest reading, after the prior period’s record $481 billion. The figure doesn’t include the actions under consideration or threatened by governments.
Philadelphia refinery explosion creates energy bottleneck. The largest refinery in the region is not expected to be up and running for months, after a big explosion Friday at the Philadelphia Energy Solutions refinery. The federal government’s analysis of diesel and gasoline prices, since the explosion, will be out today. The entire gasoline-making complex was destroyed. Reuters reported that the extent of the damage would mean gasoline production would be curtailed for an extended, undetermined period, as federal agencies launched an investigation to determine the cause of the explosion. The refinery in the past blamed the corn-based ethanol program (RFS) for the plant’s previous financial stress. It said it was forced to file for bankruptcy protection two years ago due to the high price of ethanol credits it is required to purchase to meet the mandate. It came out of bankruptcy proceedings late last summer. The refinery said it spent hundreds of millions of dollars in 2017 to buy the credits.
Consumer confidence falls sharply. The Conference Board reported Tuesday that consumer confidence fell to 121.5 in June from 131.3 in May. Economists had expected the index to fall to 131.1. In a statement, Conference Board economist Lynn Franco said, “The escalation in trade and tariff tensions earlier this month appears to have shaken consumers’ confidence. Although the Index remains at a high level, continued uncertainty could result in further volatility in the Index and, at some point, could even begin to diminish consumers’ confidence in the expansion.”
New home prices fall more than expected in May. The Commerce Department reported Tuesday that new home sales fell 7.8% in May to 626,000 units. Economists had expected sales to come in at 683,000 units. The median sales price was $308,000, down from $316,700 one year ago. At the current sales price, inventory would be exhausted in 6.4 months.