China unveils interest-rate reforms while Germany talks about possible new stimulus
In today's updates:
* Kudlow confirmed possibility of holding trade talks with China in the U.S.
Markets: Global equities rose on reports of peaceful Hong Kong protests on Sunday and on reports of possible stimulus measures in several countries, including Germany. In commodity markets, better than expected rainfall is pressuring corn and soybean values as the Pro Farmer Midwest Crop Tour gets underway.
— U.S./China trade policy update:
- Hong Kong linkage; Sunday protests large but peaceful. President Donald Trump has tied the fate of any trade deal between the U.S. and China with how Beijing handles the Hong Kong situation. If the Chinese military intervenes, international criticism would be swift. The HK situation comes weeks before the 70th anniversary of the People’s Republic of China in October, when the Communist party hopes to showcase its strength. Hong Kong hosts one of the world’s biggest stock exchanges and is where many of the contracts for companies doing business in China are written. As for Sunday's protest, a lot of people gathered in Hong Kong’s largest public park in a relatively peaceful event. While most news accounts noted “hundreds of thousands” during the Sunday protest, Jimmy Sham Tsz-kit, of the Civil Human Rights Front, said 1.7 million people joined the group's rally at Victoria Park in Hong Kong.
- Companies feel heat from China over Hong Kong protests. Beijing is increasingly putting pressure on the business world to take its side in the protests in Hong Kong. Both global and local companies are falling in line — and their employees are caught in the crossfire, the New York Times reports (link).
- Trump to give Huawei additional time to work with U.S. customers. The Trump administration plans to extend a temporary license enabling Huawei to continue working with U.S. customers despite national-security concerns that landed the Chinese telecom on an export blacklist, Reuters first reported (link). However, President Trump said, “I don’t want to do business at all” with Huawei, over security concerns.
- Kudlow confirms possibility of holding trade talks with China. White House economic adviser Lawrence Kudlow confirmed the possibility Sunday of holding trade talks with China in the U.S. to help ease fears of a spiraling trade war between the two countries. But Kudlow also said China’s response to protests in Hong Kong could affect the outcome of the discussion. Speaking on Fox News Sunday, Kudlow said American and Chinese negotiators will speak in the next week or 10 days. “If those deputies’ meetings pan out as we hope they will and we can have a substantive renewal of negotiations, then we are planning to have China come to the USA and meet with our principals to continue the negotiations,” he said. Kudlow said a conference call last week between Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin had produced “positive news.” Chinese Vice Premier Liu He and other senior Chinese officials are expected to travel to Washington for another round of face-to-face talks in September.
- Regarding Hong Kong, Kudlow said the U.S. is “on the side of freedom... We don’t want violence. The United States wants a humane ending. If that can happen that might bolster the trade deal,” he said. “The Chinese know full well that trade, security, Hong Kong, these things are all part of the general landscape.”
- Reuters: China set to deepen Argentine trade ties with bid for grains "superhighway". Chinese state-owned construction giant CCCC is preparing a bid to dredge Argentina's Parana River, the country's main cargo superhighway that takes soy and corn from the Pampas farm belt to the shipping lanes of the south Atlantic and the world, Reuters reported. Representatives of China Communications Construction Co Ltd 1800.HK and its Shanghai Dredging unit have met with Argentine government and local port officials to sound out the dredging concession, according to three people involved in the talks, which have not been previously reported. CCCC is at the forefront of China's push to lock in food supplies by investing in commodities transport hubs globally.
- Navarro again says trade war with China is not a drag on the economy or threatening the livelihoods of farmers. President Trump “has the backs of farmers,” White House trade advisor Peter Navarro said Sunday on CNN. “And all the money we're taking in our tariffs, a lot of that is going right to the farmers to keep us whole. Let's make no mistake about it. China is targeting those farmers to buckle our knees.” “China's bearing the entire burden of the tariffs. … What we see here, unequivocally, is that China is bearing the burden by lowering their prices.
- Navarro talks about the delayed new tariffs on China. On ABC's This Week, Navarro said that during an Oval Office meeting with a group of executives: "We heard from these business leaders: ... 'Just give us some time to December 15. And, by the way, we are taking all of our sourcing production facilities out of China, and we will continue to do that.'" Business officials disputed major companies are taking production facilities out of China.
- President Trump said that Tim Cook, Apple’s CEO, made “a very compelling argument” about how the company would struggle to compete with Samsung if iPhones are subject to import tariffs. Apple's MacBook laptops and iPhones won't face additional tariffs until Dec. 15, but some of the company's other products, including its AirPods, Apple Watch and HomePod, will be subject to the levies on Sept. 1.
- The Trump administration approved an $8 billion sale of F-16 fighter jets to Taiwan, a development very likely to anger China and possibly complicate the trade war.
— Canada to pay dairy farmers hurt by trade deals as election nears. Canada will spend C$1.75 billion ($1.32 billion) over eight years to compensate dairy farmers facing greater competition due to free trade deals, Prime Minister Justin Trudeau's government said on Friday. The move is seen as an attempt to satisfy an influential group of voters two months before a national election. Payments to be made in the first year are budgeted to take up C$345 million from the C$1.75 billion funded program.
The payments to dairy farmers recognize sales they have lost after trade pacts were struck with the European Union and Pacific nations, Agriculture Minister Marie-Claude Bibeau said in an announcement made at a dairy farm in Compton, Quebec.
The program will compensate farmers for the close to 5% of the dairy market given up in the Comprehensive Progressive Trans-Pacific Partnership (CPTPP) deal and the CETA trade deal between Canada and Europe. A previous program, designed to aid farmers with technology adoption to help adapt to the CETA trade agreement with Europe, was heavily criticized because the only farmers who got funding were those with a current technology project underway and had the connections to get the applications in quickly.
The new program aims to fund every farm, with payments expected to flow through the Canadian Dairy Commission and to be issued “in proportion to (farmers’) quota held.” Dairy farmers will be compensated depending on the size of their farm. Farmers who milk 80 cows, for example, will receive a direct payment of C$28,000 in the first year, for a total first year payment of C$345 million. The federal government said it “will continue to work with the Dairy Farmers of Canada to determine terms and conditions for future years.”
— Other items of note:
California again sued the Trump administration, this time to challenge the legality of a new “public charge” rule that could deny green cards to immigrants who receive public assistance, including food stamps, Medicaid and housing vouchers.
The war on sugar hits the juice box. With pediatricians and parents increasingly concerned about the health risks of juice, a growing crop of watered-down juice-box alternatives are coming to store shelves. But will kids drink them? Link to WSJ article.
Leaked government papers on the potential effects of a no-deal Brexit suggested Britons might face food, fuel and medical shortages, as well as severe delays at ports. Boris Johnson, the prime minister, says Britain has nothing to fear from leaving the European Union without a deal. The minister in charge of post-Brexit preparations said the papers highlighted the “worst-case scenario.” This week, British Prime Minister Boris Johnson will travel to Germany and France to insist to Emmanuel Macron, the French president, and Angela Merkel, the German chancellor, that Parliament cannot stop Brexit," according to The Sunday Telegraph. Johnson is expected to tell them that they have two months to agree a deal acceptable to the cabinet and parliament, without which the U.K. will exit without an agreement on Halloween.
Amazon is raising seller fees by 3% for thousands of small and medium-sized businesses in France because of a new digital tax approved by the French government, which aims to level the playing field between Big Tech and local companies. The precedent-setting levy, described by the U.S. Trade Representative's Office as "unreasonable," was passed by the French State in July. U.S. trade officials today will be hearing from tech companies and other parties on what to do about the French digital tax.
— Markets. The Dow on Friday rose 306.62 points, 1.20%, at 25,886.01. The Nasdaq was up 129.38 points, 1.67%, at 7,895.99. The S&P 500 moved up 41.08 points, 1.44%, at 2,888.68.
Major stock averages posted their third straight weekly losses, with the Dow dropping 1.5%, the S&P slumping 1% and the Nasdaq retreating 0.8%.
Dollar at highest level in two-plus years. The ICE Dollar Index, which tracks the U.S. dollar against a basket of six major currencies, stands near its highest level in more than two years and is up nearly 11% from its 2018 lows. Two major negatives of a stronger dollar: It makes U.S. export products less competitive and negatively impacts U.S. multinationals on most costly conversions of foreign revenues into the dollar. For developing countries, a more robust dollar makes it more expensive to service their dollar-denominated debt.
Troubles on the farm are reaching deeper into manufacturing supply chains. Agriculture equipment maker Deere & Co. trimmed its forecast for the year after reporting lower third-quarter sales, the Wall Street Journal reports (link), as American farmers scale back spending as a result of falling commodity prices and a yearlong trade dispute with China. Deere’s outlook highlights how slipping agriculture exports are hitting companies closely tied to farming, from seed suppliers to transport providers, even as the Trump administration parcels out aid to farmers to make up for lost sales. China’s agricultural imports from the U.S. fell 20% in the first half of the year after tumbling last year. Deere’s quarterly sales of farm equipment fell 6% from a year earlier while farm-equipment profit dropped by 24%. The company has already cut production to lower inventories and may reduce costs still further.
Trump, Kudlow, Navarro say U.S. economy is strong amid recession fears. NEC Director Larry Kudlow and Office of Trade and Manufacturing Policy Director Peter Navarro appeared on Sunday morning political talk shows to defend the state of the economy in the midst of rising recession fears, and President Trump tweeted Sunday afternoon, “Our economy is the best in the world, by far. Lowest unemployment ever within almost all categories. Poised for big growth after trade deals are completed. Import prices down, China eating Tariffs. Helping targeted Farmers from big Tariff money coming in. Great future for USA!”
Nicolas Dujovne, Argentina’s finance minister, resigned. The Argentine economy has come under pressure since President Mauricio Macri was heavily defeated in primary elections last week. The peso has lost a fifth of its value against the dollar and credit-rating agencies have downgraded the country.
Germany said it could spend $55 billion on fiscal stimulus in an economic crisis, according to Finance Minister Olaf Scholz, putting a number on a possible fiscal stimulus for the first time. While action isn't imminent, he signaled that domestic and global warning signs are increasing pressure on Angela Merkel's government to consider suspending its balanced-budget policy. They include an economy that contracted in the second quarter and the risk of expanded trade conflict with the U.S.