Fed Chairman Powell signals pause on rate hike(s), flexibility on Fed balance sheet
— U.S./China trade talks update:
- Signs of progress were noted following the first day of talks, but no major breakthroughs on several of the most complex issues. U.S. and Chinese officials had a “good conversation” during the opening session of their trade talks in Washington on Wednesday, U.S. Treasury Sec. Steven Mnuchin said.
- President Trump plans to meet today with Liu He, China’s vice premier, who is leading the Chinese delegation. Trump is scheduled to meet Liu at 2:30 p.m. CT, according to an email of his schedule from the White House.
- Trump on Twitter today: “...China’s top trade negotiators are in the U.S. meeting with our representatives. Meetings are going well with good intent and spirit on both sides. China does not want an increase in Tariffs and feels they will do much better if they make a deal. They are correct. I will be meeting with their top leaders and representatives today in the Oval Office. No final deal will be made until my friend President Xi, and I, meet in the near future to discuss and agree on some of the long standing and more difficult points. Very comprehensive transaction. China’s representatives and I are trying to do a complete deal, leaving NOTHING unresolved on the table. All of the many problems are being discussed and will be hopefully resolved. Tariffs on China increase to 25% on March 1st, so all working hard to complete by that date!”
- Wall Street Journal: “China is pinning its hopes on another meeting between President Trump and Chinese leader Xi Jinping to help solve the trade dispute between the world’s two largest economies, according to people briefed on the matter, as a wide gap remains between U.S. demands and what Beijing is willing to offer.” A high-level China trade delegation has proposed to the U.S. that Trump meet with Xi in the tropical Chinese city of Hainan after his planned summit with the North Korean leader, Kim Jong Un, in late February, the people told the WSJ. Link to article. The WSJ also reported that China this week brought “a package of modest concessions for the trade talks that started Wednesday. The package mostly involves more Chinese purchases of U.S. farm and energy products and promises to invite more American capital into manufacturing and financial-services sector.”
- Pleasantries before the talks began. The proceedings began with the leader U.S. negotiator, U.S. Trade Representative Bob Lighthizer saying: “Very pleased to have you here. Look forward to productive talks.” Liu replied: “I’d like to have a nice discussion with you.” At the end of the Wednesday morning session in the Eisenhower building, the delegates relocated to the USTR office for round two. The officials reconvened for dinner at the Willard Hotel, where the Chinese delegation is staying.
- The two-day talks could be extended, as has been the case in some other trade negotiations.
- The U.S. delegation, according to the White House, comprises Lighthizer, Mnuchin, White House trade advisor Peter Navarro, Commerce Sec. Wilbur Ross, National Economic Adviser Larry Kudlow, USTR chief agricultural negotiator Gregg Doug, Undersecretary of the treasury for international affairs David Malpass, and Deputy Trade Representative Jeffrey Gerrish. Also attending the talks: USDA Undersecretary for Trade and Foreign Agricultural Affairs Ted McKinney and USDA Trade Counsel Jason Hafemeister.
- China's delegation besides Liu includes vice-minister for finance Liao Min, Yi Gang, governor of the People’s Bank of China, National Development and Reform Commission deputy chief Ning Jizhe, foreign vice-minister Zheng Zeguang, agriculture vice-minister Han Jun, and industry vice-minister Luo Wen.
- China's commitment to purchase more American goods, especially farm and energy products, was evident during the first day of talks, sources advise.
- More complex issues raised by the U.S. remain, including China's need to scale back subsidies of state-owned enterprises, sharply open its markets to foreign investment and end its longstanding practice of forcing American companies to hand over trade secrets as a condition of doing business there.
- The U.S. is pushing for an enforcement and verification mechanism to ensure China follows through on commitments such as removing forced technology transfers. Options discussed include “snapback” tariffs that would be reimposed if China does not follow through. Another option is “carousel” tariffs that would hit different portions of Chinese products to prevent its economy from becoming immune to the pain of the duties. Chinese lawmakers this week completed a second review of a new law that is aimed at protecting the IP of foreign investors and banning forced technology transfers. But U.S. business groups said the draft law will not address the real regulatory issues of concern where forced technology transfer is occurring in the Chinese system.
- China's strategy, according to a New York Times account, citing China skeptics in the Trump administration, is “the Chinese will say anything to delay the increase in tariff rates on March 2 and to get Trump to roll back the tariffs that are already in place. At that point they expect China to wait out the rest of Trump’s term and hope for a more dovish successor.”
- Another viewpoint of the ongoing talks comes from Beijing-based journalist Michael Schuman. In an article for the Atlantic, he wrote, “The trade dispute is about far more than tariffs and deficits. It is a contest of two very different national ideologies.” Link.
- Federal Reserve Chairman comments on the ongoing trade talks. Fed Chairman Jerome “Jay” Powell on Wednesday expressed concern that prolonged negotiations could cause further uncertainty for investors. “The concern is a longer drawn-out set of negotiations, which could result in sapping business. Uncertainty is not the friend of business,” Powell said in response to a question during a press conference.
- What's coming after this week's talks end. While a breakthrough deal is unlikely from this round of negotiations, the White House has said a concluding statement will be released on the progress they’ve made on core issues such as Chinese technology transfers and intellectual property practices, market access and Beijing’s pledge to buy more American goods. The two sides have a month to broker peace in their trade war. If they fail, then on March 2 the Trump administration promises to ratchet up its tariffs, from 10% to 25%, on imports from China that were worth around $200 billion in 2018. However, an extension of the March 1 deadline is possible — if serious progress is being made but a deal isn’t finalized in another month.
— The Biotechnology Innovation Organization said China needs to agree to take more action on approving genetically modified crops, and the group wants Trump to insist on such provisions. “Any prospective trade deal with China cannot be based simply on a promise to buy more U.S. products,” said BIO President Jim Greenwood. “Such a bargain would fail to address the long-standing impediments that have contributed to the trade deficit with China.” The trade group said China’s delays in approving biotech crops have resulted in foregone U.S. economic growth of nearly 34,000 jobs.
— Grassley: Axe steel, aluminum tariffs before USMCA consideration. Senate Finance Chairman Chuck Grassley (R-Iowa) is calling for U.S. tariffs on steel and aluminum to be lifted before Congress considers passage of the new U.S.-Mexico-Canada Agreement (USMCA). “Unfortunately, our producers are unlikely to realize the market access promises of USMCA while the Section 232 tariffs on steel and aluminum imports from Canada and Mexico remain,” Grassley co-wrote in an op-ed Wednesday in the Cedar Rapids Gazette with Iowa Secretary of Agriculture Mike Naig. Link to op-ed.
Retaliation from Canada and Mexico against the tariffs threatens to “wipe out gains our farmers have made over the past two and a half decades,” the two wrote, adding they’d “be working all hands on deck” to get the deal passed but “need the administration to help us pave the way.“
— EU provides progress report on trade talks with U.S. The European Commission on Wednesday published a progress report on trade negotiations between Brussels and Washington. Link to report. It makes clear that agriculture will not be part of forthcoming negotiations, and stresses that talks will be immediately halted if President Trump imposes tariffs on cars. U.S. farm groups and farm-state lawmakers are insisting the trade talks include agriculture provisions.
— USDA finally, officially unveils report timelines. After being criticized for delaying information about release times for missed reports, and the way it was updating some but not others, USDA finally released updated timelines via public announcements:
— Other items of note:
More than 52,000 lbs of chicken nuggets were recalled in the U.S. this week alone. Tyson Foods yanked about two-thirds due to rubber contamination, and Purdue took back the rest over allergen concerns. Link to article.
The Taiwan electronics maker Foxconn is reassessing plans for a $10 billion plant in Wisconsin that President Trump had hailed as an example of a revival for American factory jobs. Link to Washington Post article.
Amazon is hauling some cargo in Embark self-driving trucks on the I-10 interstate highway, according to CNBC sources and online photos. Amazon statement: "We are always innovating and working with innovative companies to improve the customer experience and safety of our team. We think successful over-the-road autonomy will create safer roadways and a better work environment for drivers on long-haul runs.”
DowDuPont Inc.’s sales were flat in its latest quarter as lower customer demand for its appliances and automotive products as well as the drop in oil prices weighed on the manufacturer’s top line. DowDuPont finance chief Howard Ungerleider said 2019 could be a big year for the company’s agriculture products after Chinese officials cleared the way earlier this month for DowDuPont to begin selling new soybean seeds to U.S. farmers modified to stop weeds that have developed resistance to other sprays. DowDuPont’s soybeans, called Enlist, had awaited China’s approval for years. DowDuPont, formed more than a year ago through the merger of Dow Chemical and DuPont, said that it remains on track with its plans to break apart the company. By June 1, Corteva Agriscience will separate, combining Dow’s and DuPont’s crop-seed and pesticide businesses.
A new shipbuilding titan could rise in Asia as natural-gas shipments surge. Hyundai Heavy Industries Co. Ltd. wants to buy a majority stake in Daewoo Shipbuilding & Marine Engineering Co. (DSME), a merger that would unite two of the world’s biggest shipyards, the Wall Street Journal reports (link). DSME’s profits have slumped as new ship orders plummeted in recent years, and the state-run Korea Development Bank is eager to unload its stake after repeated bailouts of the ailing yard. But a pickup in tanker orders that began last year could boost its sale price, the article notes, reflecting a broader trend as growing orders for liquefied natural gas tankers, which command a higher profit margin, lift the fortunes of Asia’s shipyards. Shipbuilding is one of South Korea’s flagship industries, and a merger between Hyundai Heavy and DSME would create a combined order book of some 180 ships.
A bipartisan group of lawmakers charged with negotiating a border security deal is “cautiously optimistic” they’ll reach an agreement to avert another government shutdown before the Feb. 15 deadline. There was no additional border wall money in the opening Democratic offer, which was heavy on new customs officers and technology for border agents to utilize at points of entry. But this is seen as an opening position. President Trump does not have anyone representing him at the congressional meetings and there are no plans for lawmakers to visit the White House.
— Markets. The Dow on Wednesday rose 434.90 points, 1.77%, at 25,014.86. The Nasdaq gained 154.79 points, 2.20%, to 7,183.08. The S&P 500 added 41.05 points, 1.55%, at 2,681.05.
U.S. stocks are set for their biggest January rally in three decades, with European markets in line for their biggest monthly gain since October 2015.
The Federal Reserve has put a pause on interest rates, saying it expected continued growth but stood ready either to increase or to reduce rates, depending on economic conditions. The Fed’s chairman, Jerome “Jay” Powell, on Wednesday said economic growth remained “solid” and the central bank expected growth to continue, but the Fed had “the luxury of patience” in deciding whether to raise rates again. “The case for raising rates has weakened somewhat,” Powell said, pointing to sluggish inflation, slowing growth in Europe and China, and the possibility of another federal government shutdown. The Fed also announced that it was prepared to slow or even reverse the steady slimming of its bond portfolio. While the Fed is pausing for now, Powell said he believed the central bank had raised rates to an appropriate level and had not overtightened. “I think our policy stance today is appropriate for the state of the economy,” he said. “That’s my feeling.” As for any hike in rates ahead, Powell said he “would want to see a need for further rate increases, and for me a big part of that would be inflation.” The Fed released projections showing most of its officials predicted at least two rate increases in 2019, with many in the private industry at none to just one rate hike. The Fed emphasized its plans were subject to change. “The committee is prepared to adjust any of the details for completing the balance sheet normalization in light of economic and financial developments,” the FOMC statement said. It added the Fed was even willing to increase the size of the balance sheet, if necessary. Bottom line: Patience is a virtue.
Goldman Sachs Group Inc. economists see just a 25% chance of a rate rise in the second quarter, down from 55% previously.
China’s official purchasing managers index showed manufacturing contracting for the second month in a row in January, but not rapidly deteriorating as in December. Services activity rose at its quickest pace since June—another sign that while Chinese consumers are struggling, claims of collapse have been exaggerated. And the recent rapid decline in Chinese factory gate prices slowed. Details: Manufacturing activity in China contracted for the second-straight month in January — another sign the world’s second-largest economy is slowing. The official manufacturing PMI came in at 49.5 amid domestic headwinds and the ongoing trade dispute with the U.S. China's services sector posted stronger figures, recording a PMI of 54.7, helping cushion the impact of decelerating factory activity.
Italy is officially in a recession. Output in Europe's fourth largest economy contracted 0.2% in Q4, on the heels of a 0.1% drop in the quarter before that, marking a fresh setback for the new anti-establishment government. Italy's two-year government bond yield hit 0.243% on the news, falling 4 basis points to its lowest level since May 2018.
Global trade volumes, rising between 3% and 5% on the year in mid-2018, barely grew at all in November, according to data from the Netherlands Bureau for Economic Policy Analysis. Analysts say that signals global trade could already be contracting in volume terms.