Japan economy grows 2.1% 1Q | Injunction denied on EPA small refiner exemptions
U.S./China trade policy update:
- It looks like China leaders are betting on a protracted trade war with the United States. So say a growing number of China waters. They note China has to major advantages in pursuing a lengthy conflict: (1) far more flexibility regarding economic (interest rates, currency) and stimulus actions (boosting certain sectors of the Chinese economy) and (2) China nationalism in confronting any hint that they are being bullied and humiliated. President Trump, meanwhile, does not have time on his side, with 2020 elections and some of his core voters (rural sector, business) facing pressure from Trump's various tariffs.
- U.S. time line on China, USMCA: 180 days. U.S. Trade Representative Bob Lighthizer is engaged in trying to reset trade relations with China and secure congressional approval of the USMCA deal. “If agreements are not reached within 180 days, the president will determine whether and what further action needs to be taken,” a White House statement said.
- The U.S. is likely to permanently lose soybean export market share in China the longer U.S./China trade talks drag on, a top executive at the U.S. Soybean Export Council (USSEC) industry group said on Friday. China is also unlikely to ever return to importing record volumes of U.S. soybeans, as the world's top soy consumer did as recently as 2016, even if trade talks between the two countries wrap up promptly, said Paul Burke, USSEC's senior director of U.S. soy marketing, on a conference call with the media. These remarks are far different than those from USDA Secretary Sonny Perdue who repeatedly says he believes there will be no long-term impacts from the U.S./China trade conflict.
- Deere & Co Friday missed quarterly profit estimates for the fifth-straight quarter and cut its full-year outlook, as an escalating U.S./China trade war threatens to further hit farm incomes and demand for the company's equipment. The slump in demand for big agricultural machines has forced the company to cut production by 20% at two of its large factories in North America. "Ongoing concerns about export-market access, near-term demand for commodities such as soybeans, and a delayed planting season in much of North America are causing farmers to become much more cautious about making major purchases," Chief Executive Officer Samuel Allen said in a statement. Deere, which gets nearly 60% of its sales from the U.S. and Canada, said it now expects full year equipment sales to rise by 5%, compared with a 7% rise it had previously expected, as large farm machinery sales lag.
- Google will exclude Huawei from further updates to its Android operating system, Reuters first reported. Google said it is complying with an order from the American government, which last week added the Chinese telecoms giant to a list of companies with which American businesses may not trade without a license. Chipmakers including Intel and Qualcomm also said they would stop supplying Huawei. Impacts: Existing products would continue to receive Google updates, but future devices would have to use the open-source version of the operating system, without services like YouTube and Google Maps. Some predict China will now develop a homegrown smartphone operating system, design its own chips, develop its own semiconductor technology and implement its own technology standards.
- European business group: China technology transfer issues increasing. Forced technology transfers in China continue to increase even as the Chinese government says those types of actions do not take place, according to results of a survey released by the European Union Chamber of Commerce in China. The group said 20% of its members reported being compelled to transfer technology as a condition for market access in China, up from 10% two years ago. The survey indicated that nearly 25% of those reporting the activity said it was still ongoing with another 39% saying it had happened less than two years ago. The level of forced technology transfers was higher in areas like chemicals and petroleum (30%) medical devices (28%) and pharmaceuticals (27%), the survey said. "Unfortunately, our members have reported that compelled technology transfers not only persist, but that they happen at double the rate of two years ago," European Chamber Vice President Charlotte Roule said. "It might be due to a number of reasons... Either way, it is unacceptable that this practice continues in a market as mature and innovative as China." The survey was done in January and February, before the latest tariff increase announced by the U.S. As for the U.S. tariffs, the group said nearly half of the companies affected said they had covered the increased costs themselves and kept prices steady.
- Big companies have tightened spending as trade fears intensify. Capital spending rose 3% from a year earlier in the first quarter at 356 S&P 500 companies that had disclosed figures in quarterly regulatory filings through midday May 8, according to an analysis by the Wall Street Journal of data supplied by Calcbench, a provider in New York and Cambridge, Mass. That is down from a 20% rise in the year-ago period for the same companies, the analysis shows. Link for details.
— Meat prices set to climb as swine fever hits China's hogs. The firms that sell Big Mac and Whopper burgers, Jimmy Dean sausages and Dunkin’ bacon sandwiches all expect meat prices to rise this year, as China imports more pork, beef and poultry to fill a shortfall in its huge hog market, the Wall Street Journal reported (link).
— Court denies injunction on EPA small refiner exemptions. The U.S. Court of Appeals for the District of Columbia Circuit May 17 denied a request from the Advanced Biofuels Association for an injunction against EPA to prevent the agency from continuing to grant small refiner exemptions under the Renewable Fuel Standard (RFS). The court ruled that the group had not met "stringent requirements" for granting the injunction as the court considers a broader case brought by the group over the exemptions. Arguments in the broader case are scheduled for June.
— Round two of aid from Washington for farmers may not provide the fertile soil for growth sought by companies tied to agriculture supply chains. The USDA is working on another ag sector relief program of up to $20 billion, but an article in the Wall Street Journal (link) says many farmers doubt the package will make up for a trade dispute that has shut them out of the big Chinese market. “U.S. exports of many agriculture products have declined, dragging commodities prices down to the lowest levels in years. U.S. farm debt is mounting and farmers in the Midwest are filing for bankruptcy at levels not seen for at least a decade. Severe Farm Belt flooding has exacerbated the slump, and the impact is hitting companies that serve the sector.” Deere & Co. lowered its outlook over slackening demand for its farm equipment and said progress in trade talks “is becoming increasingly important.” Link for more possible details on the coming second round of Trump tariff aid payments.
— Other items of note:
President Donald Trump said any war with Iran would mean the “official end” of the Gulf state. Tensions between the two countries have risen as America has introduced sanctions, deployed warships and withdrawn some diplomatic staff from neighboring Iraq, citing a threat from Iran. For its part, Iran has tried recently to downplay tensions, saying it wants to avoid conflict. Meanwhile, a rocket that exploded Sunday outside the U.S. embassy in Baghdad is of a design trafficked by Iran and used by Middle Eastern terrorist groups. While it is unclear who was responsible for firing or supplying the Katyusha rocket, weapons of the same type were seized by Yemeni authorities on an Iranian ship in 2013. Iran is known to support terrorist groups in the region both financially and with arms, and Iranian forces are known to field Katyusha rockets.
Senate Majority Leader Mitch McConnell (R-Ky.) said last week that he would force a vote on a disaster aid proposal this week regardless of whether the two sides reach an agreement. Senate Appropriations Committee Chairman Richard Shelby (R-Ala.) said negotiators were “closer than we’ve ever been” to a deal, though some hurdles remained. Those included the administration’s $4.5 billion emergency request for the border and harbor maintenance funding.
Taxes and infrastructure funding. Illinois Gov. J.B. Pritzker proposed to pay for a $41.5 billion plan to rebuild the state’s crumbling infrastructure with several new taxes, including a doubling of the gas tax.
Trump the protectionist? “I don’t think there is any more doubt about it, the president is far more attracted to managing imports than expanding exports,” said Rufus Yerxa, president of the National Foreign Trade Council. “The entire U.S. auto and auto parts sector understands why it needs a global strategy, but the president clearly prefers 1980s style protectionism.”
— Markets. The Dow on Friday fell 98.68 points, 0.4%, to 25,764.00. The S&P 500 slipped 16.79 points, 0.6%, to 2,859.53. The Nasdaq lost 81.76 points, 1%, to 7,816.28.
For the week, all three indexes notched weekly declines, with the blue-chip index posting its longest losing streak since May 2016, while the S&P 500 and Nasdaq recorded two straight weeks of losses.
Surprising strength in Japan first quarter GDP. Japanese GDP for the first quarter rose 2.1%, well above expectations for a flat to slightly higher reading. The result came despite concerns over the U.S./China trade situation and a slowing in the Chinese economy. The latter appeared to be a factor in the decline in capital expenditures of 1.2% on an annualized basis with private consumption also falling 0.3% — private consumption accounts for around 60% of Japan's economy. But the solid result for the first quarter does not alter expectations for Japan to increase its sales tax to 10% in October. "There's no change to our view that the fundamentals supporting domestic demand remain solid," Japan Economy Minister Toshimitsu Motegi said after the GDP update. He did note some of the decline in capital expenditures was likely due to the trade and Chinese economic situation. Analysts note that many details of the report were weak, with exports, consumption and business investment all declining. Large revisions to the first estimate of Japanese GDP are common and the seeming strength could disappear in later numbers. Focus now turns to the Bank of Japan’s Tankan survey of business conditions, due for release on July 1, the last major data release before upper house elections later in July.
OPEC countries indicate they will stick with output reductions. The Sunday meeting of the OPEC Joint Ministerial Monitoring Committee resulted in cartel countries agreeing to continue their efforts to reduce crude output. Cartel members conceded they needed to reduce crude inventories "gently," Saudi Arabian Energy Minister Khalid al-Falih told reporters, but he added his country would also be responsive to needs in the "fragile market."