Xi tells import expo China will open market further in globalization push; equities rally
In today's updates:
* U.S. and China are mulling rolling back existing tariffs
Markets: Goldman Sachs CEO David Solomon said U.S. markets are more focused on the election than President Trump's impeachment, which probably won't happen anyway. He told Bloomberg TV he'd be surprised if the Fed cut rates again, given the economic data, and he criticized the negative rates introduced by other central banks. "When the book's written, it's not going to look like a great experiment."
Cold weather forecasts boost natural gas. Nymex natural gas futures continue to climb, up 2.6% to $2.895/MMBtu, bringing their rally to 35% from a multi-year low hit three months ago. Prices soared more than 4% yesterday to their highest level since March, as forecasts call for cooler than expected temperatures across the U.S. in the coming days and weeks. Hedge funds and other speculative investors appear to be turning slightly less bearish, and analysts say an unwind of those bets can exacerbate bullish price moves such as the current one.
The return of Popeyes' chicken sandwich prompted sellouts and a fatal skirmish. Franchisees hired more staff to cope with demand and many locations across the U.S. sold out. A scuffle over cutting the line in a location in Washington ended with a person being killed in a stabbing. Police said the man was waiting for the sandwich.
— U.S./China trade policy update:
- The U.S. is debating whether to roll back levies on $112 billion of Chinese imports, the Financial Times first reported (link/pay wall). The Wall Street Journal then reported (link) both countries are mulling tariff reduction to complete Phase 1 of the pending deal. The deal was previously expected to deter the U.S. from imposing new tariffs on Dec. 15 as planned. The Financial Times earlier reported that Trump administration officials were considering cutting tariffs of 15% on about $111 billion in Chinese imports imposed Sept. 1, which directly affect the price of imported consumer goods. The Trump administration has already suspended a planned increase in tariffs on $250 billion of goods from 25% to 30% that was due to take effect on Oct. 15. China could remove tariffs on a reciprocal amount of U.S. goods, mostly farm products, sources signal.
- Rolling back some existing tariffs would meet a core demand by China in ongoing trade talks involving a potential Phase 1 accord. The FT said Washington would probably expect something in return, “including beefed up provisions on the protection of intellectual property for U.S. companies, greater certainty on the scale of Chinese purchases of U.S. farm products, and a signing ceremony for the agreement on American soil.”
- Market impact: With the U.S. considering rolling back tariffs on Chinese imports, the yuan has strengthened beyond seven per dollar for the first time since August. The move, if confirmed, "can be regarded as a turning point" in the U.S./China trade war," according to Ken Cheung, a Mizuho currency strategist.
- China comments. "Trade consultations have made progress and are advancing in accordance to plan," Chinese Foreign Ministry spokesman Geng Shuang told reporters in a briefing. Asked about the tariff situation, Geng said he could only speak in “principle” on the topic. “Adding tariffs is not the correct way to resolve trade issues,” he observed.
- Commerce Secretary Wilbur Ross said in a telephone press conference from Bangkok today that achieving a phase one deal will help rebuild trust between the two sides, and that he hoped it would be the precursor of further discussions.
- There are incentives for both China and the U.S. to reach a pact along reported developments, said Myron Brilliant, head of international affairs at the U.S. Chamber of Commerce, a business lobby group. “Each side has decided that getting to this deal is important at this point and to get there is going to require some concessions. The administration is going to have to show some leg on tariffs and the Chinese are going to have to accept a more robust IP chapter,” Brilliant said. Meanwhile, Derek Scissors, a resident scholar at the American Enterprise Institute, and a usual go-to guy for a conservative and usually negative comment on the talks, said: “Right now he [Trump] can point to a falling trade deficit with China as undoing some of the damage he campaigned so strongly against in 2016. Removing tariffs and seeing the deficit rise would allow Democrats to say he lied to voters.”
- President Trump and Chinese leader Xi Jinping have been in contact and progress in trade talks is being made, according to China's foreign ministry. Michael Pillsbury, a China trade adviser to President Trump, estimated the Trump/Xi talks have taken place about once a month. “They have up to hour-long conversations, so the two of them have kept in touch,” Pillsbury told the Fox Business Network. He said the last few weeks and especially the last few days ahead of any accord “is when the most horse trading as we would say gets done. They (Chinese) really don't like to do long- range concessions; they want to do the deal at the last point, which is why I think what [Commerce Sec.] Wilbur Ross said in Bangkok today, and I agree with him, that this is getting very complicated. This deal is getting very, very complicated.” Pillsbury added that “there needs to be some kind of enforcement mechanism for Phase 1 or the whole thing is just a disaster.” U.S. Trade Representative Bob Lighthizer has made it clear throughout that he is focused on enforcement of any agreement.
- Chinese President Xi Jinping talked about international trade at an expo in Shanghai. He said his country will give greater importance to imports, lowering tariffs and institutional transaction costs. While not speaking directly about ongoing U.S./China trade negotiations, Xi said, “We will deliver on what we have promised.”
- To combat a worsening economic slowdown, China’s central bank lowered a key interest rate for the first time in three years while Xi was addressing an audience that included French President French Emmanuel Macron, Hong Kong Chief Executive Carrie Lam, and the prime ministers of Greece, Serbia and Jamaica.
- Caixin October China services PMI eases. Services activity in China slowed in October to a reading of 51.1, according to the October Caixin/Markit services PMI reading. That was the lowest mark since February and down from a September reading of 51.3. The subdued result reflected a slowing in new orders and business confidence that reached a 15-month low.
- Naysayers surface re: China's possible big buys of U.S. farm products. Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, is casting doubt on the potential for China to buy up to $50 billion worth of U.S. farm goods annually under a phase one trade deal. “It’s unlikely either side could deliver on its bloated promises to sharply increase U.S. farm exports to China to $50 billion annually, or anywhere near that total,” Schott wrote in a blog post published Monday (link). “Total U.S. farm export revenues have averaged about $130 billion annually for the past three years. If farm sales to China were to rise to $50 billion a year, China would account for almost 40% of U.S. farm export revenues... Of course, over time farmers can adjust production and plantings to boost output,” Schott added. “But there are limits to how much and how fast production can ramp up without spiking prices for U.S. consumers.” Schott also noted the deal, if realized, could put farmers in the risky position of being dependent on China for a big share of their income.
- Bottom line: You can feel the momentum towards at least a Phase 1 accord, and that is reflected in the equities rally as an agreement would boost some certainty in trade relations. But the more positive tone also brings out the usual naysayers of dealing with China, and as if on cue, comments surface from Derek Scissors at the American Enterprise Institute. Look for other conservative commentators, and perhaps some Democratic lawmakers, to say President Trump is moving away from the initial push for structural reforms in China.
— China to reduce number of small hog slaughterhouses in bid to battle ASF. The number of small slaughterhouses in China will be reduced as the country seeks to continue its battle against African swine fever (ASF), according to the Ministry of Agriculture and Rural Affairs. The agency said it would review slaughterhouses starting in mid-November and close those that do not meet requirements. The agency said that there are too many small slaughter plants in some portions of the country that are old facilities and operate with older production techniques and do not properly conduct pork quality checks.
— The milk road to China is driving dairy prices higher. Growth is slowing in the world’s second-largest economy, but the country's citizens are consuming more dairy in the form of baked goods and beverages such as tea topped with cream and cheese. Link to WSJ article.
— Peterson urges MFP 2 changes. House Ag Chairman Collin Peterson (D-Minn.) is asking USDA to address several issues with the Trump administration's latest Market Facilitation Program (MFP 2) trade mitigation package, including crops that aren’t eligible for aid and the formula for determining payments to dairy producers — dairy farmers have questioned why their payments are based on their established farm program production history, rather than actual production, like other commodities under the program. “The current program has created winners and losers among neighbors who find themselves facing the same market situations, meaning that some producers may remain viable while others may be forced out of business,” Peterson wrote in a letter to USDA Sec. Sonny Perdue. Link to letter.
— Other items of note:
The U.S. officially announced withdrawal from the Paris climate accord on Monday. Secretary of State Mike Pompeo announced the move in a statement. "President Trump made the decision to withdraw from the Paris Agreement because of the unfair economic burden imposed on American workers, businesses, and taxpayers by U.S. pledges made under the Agreement," Pompeo said. "The United States has reduced all types of emissions, even as we grow our economy and ensure our citizens' access to affordable energy. "The U.S. approach incorporates the reality of the global energy mix," he added, arguing "innovation and open markets" will drive emissions reductions. The agreement allowed the U.S. to begin the process to withdraw on Monday and finalize the U.S. exit from the agreement on Nov. 4, 2020 — just one day after the presidential election.
House impeachment inquiry investigators released transcripts from closed-door depositions on Monday, while four White House officials defied subpoenas to testify.
Rep. Shimkus opts to stick to retirement plans. Last week saw Rep. Greg Walden (R-Ore.) state that he has decided to not seek re-election in 2020. In the wake of that announcement by the ranking Republican on the House Energy & Commerce Committee, Rep. John Shimkus (R-Ill.) said he was “at least reconsidering” retirement. Shimkus is the second ranked Republican on the panel behind Walden. However, Shimkus announced Monday he would stick with his plan to retire after the current Congress.
U.S. issues more sanctions against Iran. The Trump administration has placed new sanctions on nine officials in the inner circle of Iran’s supreme leader, Ayatollah Ali Khamenei. The move coincided with the 40th anniversary of Iran seizing the U.S. embassy in Tehran, where it held 50 Americans hostage for 444 days. It also comes as Iran again increased its uranium enrichment capacity, this time by restarting advanced centrifuges. Khamenei has repeatedly rejected nuclear negotiations with the United States.
India decided not to sign China-backed pan-Asian trade deal RCEP amid concerns its domestic market will open up to Chinese goods, even as 15 other participating nations agreed to forge ahead. Narendra Modi, India’s prime minister, told countries at the Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok that India would not sign off on the RCEP agreement, according to India’s foreign ministry. "This reflects both our assessment of the current global situation as well as of the fairness and balance of the agreement," said Vijay Thakur Singh, a diplomat in charge of East Asian relations for India. The remaining 15 countries will continue working towards the pact that would cover nearly a third of the world's GDP, while China announced that India is welcome to join the RCEP whenever it's ready.
Young farmers are having a hard time purchasing farmland due to high prices and a lack of market information. In Minnesota, just 6% of farmland is owned by someone under 35 years old, the StarTribune reports (link).
Responding to revelations of corruption and exploitation of EU farm subsidies revealed by the NYT, officials there said that outright fraud was rare and that auditors swiftly rooted it out. Link to article.
A second McDonald's executive departs. The burger giant said its top human-resources executive has left the company, days after its CEO was fired because of his relationship with an employee.
— Markets. The Dow on Monday gained 114.75 points, 0.42%, to a new high of 27,462.11, and brought its 2019 rally to 18%. The Nasdaq rose 46.80 points, 0.56%, at 8,433.20. The S&P 500 added 11.36 points, 0.37%, at 3,078.27. The S&P 500 and Nasdaq reached new heights as well. The S&P 500 is up 23% for the year and on track for its best annual performance since 2013.
OPEC lowered its forecast for oil demand as fears mount that a recession will reduce the need for it. It predicted a slide of about 7% over the next four years to an average 32.7 million barrels a day. The cartel forecast its share of world markets will shrink until the middle of the next decade because of a flood of U.S. shale supplies. Details: The 14-member group lowered its outlook numbers for global oil demand growth to 104.8 million barrels per day by 2024, and 110.6 million bpd by 2040. OPEC's production of crude oil and other liquids is also expected to decline to 32.8 million bpd by 2024, compared with 35 million bpd in 2019. That comes as OPEC has struggled to maintain a high oil price. In December last year, OPEC and its allies, as well as Russia, agreed to cut output by 1.2 million barrels a day to support the price of crude. Yet prices have slumped from almost $75 in April to around $60. A drone attack in September on Saudi Arabia’s biggest processing facility pushed prices up, but only temporarily. OPEC’s chief, Mohammad Barkindo, said in October that the club and its allies may consider deeper cuts to oil production when they meet in Vienna in December. After his comments, oil prices ticked up.
U.S. heavy equipment maker Caterpillar says it is cutting 120 jobs in Texas, citing market conditions.
T-Bill buying. "With roughly $2.4 trillion of Treasury bills outstanding and daily turnover of around $95 billion, the bill market has substantial capacity to support our activity, and we expect to be able to maintain the current pace of Treasury bill purchases for some time," said Lorie Logan, who is the acting leader of the Markets Desk at the New York Fed. "So far, reserve management purchase operations have proceeded smoothly," she added, noting that the Fed "is prepared to adjust the pace and other parameters of the reserve management purchases as necessary."