EPA publishes RFS reform rule | Brexit extension | MFP 2 payments | U.S. deficit swells
In today's updates:
* 'Almost done' Phase 1 of U.S./China trade talks: China
Markets: The Federal Open Market Committee (FOMC) is expected to make its third quarter-point interest rate cut Wednesday afternoon, followed by comments from Fed Chairman Jerome Powell.
California wildfire grows overnight. California’s governor declared a state of emergency as a wildfire north of San Francisco burned nearly uncontrolled and millions of people were left without power as utilities tried to prevent more fires amid raging winds. The largest of six wildfires in northern California, in the wine country of Sonoma County 44 miles north of San Francisco, began on Wednesday evening and now covers 30,000 acres.
What Nats fans have in common with the biofuel industry. Going into Game 3 at Nationals Park, Nats fans were hopeful of an eventual World Series win. But before games 3, 4 and 5, all lost by Washington, Houston Astro players held a closed-door meeting and everything changed. Nats fans wonder if EPA Administrator Andrew Wheeler was in the room. We are waiting on USDA Secretary Sonny Perdue to tell us everything will be okay once we understand the plan.... Meanwhile, it was no news that President Trump, who attended Sunday's game, was booed by some “fans,” as a big majority of Washington-area-based fans always vote Democratic. It's called preservation.
— U.S./China trade policy update:
- Friday telephone conversation between high-level officials from both countries; negotiators are expected to talk again soon: China’s Ministry of Commerce. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke by phone Friday with China’s Vice Premier Liu He, and afterward put out a statement saying they “made headway on specific issues and the two sides are close to finalizing some sections of the agreement,” helping lift financial markets.
- Gist of “basically completed” Phase 1 deal: The halt of additional U.S. tariffs in exchange for a two-year phase-in of Chinese purchases of a U.S.-reported $40 billion to $50 billion of American farm goods, new rules on currency manipulation and efforts by China to finish opening its financial sector to foreign firms. It might include some measures to protect intellectual property. For more on Phase 1 developments, see next bullet.
- China’s Ministry of Commerce said it has reached a consensus on some agricultural product regulatory issues with the U.S., adding that technical consultations for some parts of the text for the trade agreement are basically completed. In the statement from China, the two sides reached an agreement for the U.S. to import cooked poultry products from China, as well as to regard its catfish product regulation system as equivalent to the United States. China will also lift the ban on American poultry exports and apply the Public Health Information System for meat products, the ministry said. According to a statement from Xinhua on Saturday, the two sides have reached consensus on U.S. imports of Chinese cooked poultry and a quality supervision system for catfish products, as well as China lifting a ban on U.S. poultry, and how to apply a public health information system for meat products. “Both sides agreed to appropriately resolve the core concerns of both parties,” it said. “Working-level deputies will speed up talks for the trade deal before the principals talk over the phone in the near future,” it said.
- Phase 2 and perhaps Phase 3: Everything else negotiators have been talking about for over a year — especially forced transfer of technology and limits on the movement of data and subsidies enjoyed by Chinese competitors. This is why many U.S. business execs are concerned: They have waited long enough. And this is why one opinion writer in the Wall Street Journal wrote, “Cutting a soft bargain with the rest of the world would drive a resurgence in U.S. business investment. Slashing U.S. tariffs on goods coming from places other than China would also exert even more competitive pressure on Beijing.” Chinese officials say a new foreign investment law coming into effect next year addresses Washington’s demands on opening up to foreign companies, but some U.S. execs note measures Beijing has taken to limit foreign participation in information technology, telecommunications and the free flow of data in the country, hurdles even if they are allowed to establish fully owned subsidiaries there.
- U.S. Trade Representative issues list (link) of exclusion requests to tariffs on China.
- How long has the U.S./China trade war lasted? Day 1 was July 6, 2018, when the U.S. implemented the first China-specific tariffs. The U.S. Customs and Border Protection (CBP) began collecting a 25% tariff on 818 imported Chinese products (List 1) valued at $34 billion for the first round of tariffs, giving effect to the first round of tariffs, which were revised and announced on June 15, 2018. So, the trade war between the two countries is on Day 479, as of Monday, Oct. 28.
- China industrial profits show biggest decline in four years as U.S. tariffs impact. Profits at China’s industrial enterprises shrank 5.3 per cent in September from a year earlier, marking the deepest fall in four years, according to data from the National Bureau of Statistics (NBS) on Sunday. It was the biggest decline since August 2015, as the trade war with the U.S. took its toll on China’s economic activity. In the first nine months, combined profits made by Chinese industrial enterprises fell 2.1% from the same period last year, the statistics agency said. Car manufacturing profits dropped 16.6%, and profits in the textile industry fell 4.3%, according to NBS. Manufacturing profits fell 3.9% in the first three quarters.
- Hong Kong has fallen into recession, hit by five months of anti-government protests that erupted in flames at the weekend, and is unlikely to achieve any growth this year, the city's Financial Secretary said. Protests continued this weekend, with police responding with tear gas, water cannons and rubber bullets.
- China wooing foreign companies as trade war weighs on growth, the Wall Street Journal reports (link). Senior Chinese government figures are dialing up the charm in an effort to attract U.S. and other foreign companies to invest there. The ongoing tit-for-tat trade war with the Trump administration has created enough headwinds to concern Chinese leaders that, without foreign investment, they may fall short of President Xi's goal of doubling the economy in the decade from 2010 to 2020. Hence, the charm offensive.
- China's Communist party elite sits down today for its first top policy-setting meeting, or plenum, since early last year, during which leaders will discuss their next five-year economic blueprint, according to Chinese officials involved in policy making. The meetings are a four-day event.
- Bremmer on geopolitics and Chinese President Xi Jinping. Ian Bremmer is a political scientist and founder of the Eurasia Group consultancy. In the latest Barron's (link/paywall), Bremmer says “geopolitics, like economics, are cyclical. People don’t recognize that because geopolitical cycles are a lot longer. We had a good run of U.S.-led global institutions [like the G7, the seven largest advance economies], reflecting a new order after World War II. Now they’re unwinding. We’re entering an interregnum where the institutions increasingly don’t work. We need to build new ones.”
Asked why this is happening, Bremmer said: “It’s extraordinary when you have Western-led global institutions, but economic, political, and even military power increasingly residing outside the trans-Atlantic. The U.S. can talk about a pivot to Asia, but it’s really hard for the global architecture to do this. It’s hard to get troops out of the Middle East. It’s hard to compromise with the Chinese, who have very different institutions and values and norms. The U.S. foreign-policy establishment once believed that as China became wealthier, it would align more with the U.S., or fail. That was just wrong. In the past three years, the biggest change was created not by President Donald Trump in the U.S. but by President Xi Jinping in China, with his anticorruption program, consolidation of power, end to term limits, the Belt and Road infrastructure initiative, and the AI 2030 and Made in China 2025 policies. This is world-changing stuff.”
— In just a year, African swine fever has wiped out about half of China’s pig herd, the largest in the world, and has since spread to neighboring countries in Asia. It’s causing huge price hikes within China and massive disruptions in the global market for meat. Pork producing countries, including the U.S., are now on high alert. The sheer scale of the crisis can be blamed, at least partially, on the rapid pace of economic development in China, but also on bureaucratic ineptitude. In the latest episode of Because China, Quartz reporter Isabelle Niu takes viewers inside one of the largest Chinese pig farms devastated by the deadly virus to explain how regulatory failures in China can quickly spill out far beyond its borders. Link to video (paywall).
— EPA finally published its proposed RFS reform rule (link) in the Federal Register. EPA is proposing to reallocate the waived volumes based on a three-year average of the exempted amounts recommended by the Department of Energy. “We are proposing to project the volume of gasoline and diesel that will be exempt in 2020 due to small refinery exemptions based on a three-year average of the relief recommended by the Department of Energy (DOE). From 2016–2018 the relief recommended by the DOE would have resulted in a reduction to the renewable volume obligation of approximately 770 million RINs per year,” EPA says in the document. EPA is also requesting comment on using the period of 2015-2017 for relief recommended by DOE which would have resulted in a reduction of approximately 580 million RINs.
House Democrats sense an election-year issue with the Trump administration's apparent flip-flop on RFS reform, to the dismay of biofuel proponents. The title of a Tuesday hearing says it all: “Protecting the RFS: The Trump Administration’s Abuse of Secret Waivers.” Sen. Joni Ernst (R-Iowa) said last week that she would call for EPA Administrator Andrew Wheeler’s resignation if the agency doesn’t ensure that 15 billion gallons of biofuel are blended into U.S. gasoline, as required under the RFS.
— USDA will not be final say in coming decision on second installment of MFP 2. While some USDA officials cite progress in U.S./China trade talks, a coming decision on a second installment of Market Facilitation Program (MFP) 2 payments will be made by White House officials, including President Trump, NEC Director Larry Kudlow and the Office of Management and Budget. One farm policy analyst said, “With the criticism Trump and USDA Secretary Sonny Perdue are getting relative to the recent RFS proposed rule, the last thing they need is to pull back from announcing MFP 2 payments. The second installment decision is expected sometime in November, with the third installment decision coming in January.
As of Oct. 21, USDA said that $5.94 billion has been paid out via the MFP 2 effort.
— Other items of note:
- Islamic State leader Abu Bakr al-Baghdadi was killed during a top-secret operation. Baghdadi, who led the Islamic State terror group, killed himself and several of his children in a suicide blast during a U.S. military raid in Syria, President Donald Trump said at the White House on Sunday. The reported death of Islamic State's ideological leader follows Trump's decision to pull troops out of Syria.
- Peronists return to power in Argentina as Macri concedes defeat. Argentina’s Mauricio Macri conceded defeat in Sunday’s presidential elections, returning to power the populist Peronist party that has governed Latin America’s third-largest economy for all but six of the past 30 years. Alberto Fernández, the 60-year-old former cabinet chief from 2003 to 2008, garnered 48% of the vote (surpassing the 45% threshold to avoid a runoff vote in late November), while Macri’s center-right coalition received 40.5%, with 95% of the ballots counted. “The times ahead will not be easy,” Fernández told supporters. The country is on the brink of its ninth debt default, is in recession and inflation is about 55%.
- Most likely reason why Elizabeth Warren surged in the polls for the next Democratic presidential candidate: her call for forgiving student debt. The student debt plan and the polling shift are correlated, but that doesn't prove causation, says Axios. But others differ. Sanders also got a big focus from his student loan cancellation plan, but Warren's timing beat the Independent Sanders' move.
- EU extends Brexit deadline until Jan. 31. The European Union agreed to push back the date for the U.K. to leave the bloc, with an earlier exit possible if the country's Parliament passes a withdrawal deal sooner.
- Bank of America believes the just-settled 40-day strike will cost GM more than $3 billion in profits, most of which will show up this quarter. Production at 30 plants will ramp back up as soon as possible in order to recoup the lost production of 300K cars and allow workers to earn back (via overtime) lost wages. Meanwhile, the pact could also pose problems for GM's Detroit competitors. The union is planning to use the deal as a template in talks with Ford and Fiat Chrysler.
— Markets. The Dow on Friday gained 152.53 points, 0.6%, to 26,958.06, ending the week ended the week up 0.7% and 1.5% from its July high. The Nasdaq Composite reversed an early loss to add 57.32 points, 0.7%, to 8,243.12, hitting its fourth straight week of gains, adding 1.9% for the week and 1% from its last record. The S&P 500 rose 12.26 points, 0.4%, to 3,022.55, ending the week up 1.2%.
Fiscal year 2019 deficit swells to $984 billion. The final FY 2019 deficit of nearly $1 trillion is $205 billion or 26% greater than the previous fiscal year, the Treasury Department and Office of Management and Budget reported Friday. Tax receipts grew by about 4%. Corporate tax receipts climbed 12% over the prior year, while customs duties surged 70% via President Donald Trump's tariffs on Chinese and other goods imports. But spending grew by 8%, including in the largest categories such as Medicare, Medicaid, Social Security and defense.
Of note, net interest payments on the debt grew nearly 16% over the prior year, to $376 billion... more than total outlays last year for USDA, Education, Housing and Urban Development and Homeland Security combined. Total debt held by the public, which excludes Treasury securities held by federal government trust funds, hit $16.8 trillion, or 79% of GDP, a slight increase from the previous year.