China delegation to U.S. Jan. 13 | USMCA could get Senate vote this week
In today's updates:
* Iran: Will no longer comply with nuclear-enrichment limits under 2015 deal
Markets: Global stocks drop, oil jumps — Brent crude futures blasted past $70/bbl in response to mounting tensions in the Middle East. The U.S. economy's exposure to rising crude oil prices is relatively low. The nation's oil intensity (oil consumed per unit of GDP) has declined significantly in recent decades. And U.S. net imports of crude are at the lowest level in years. Meanwhile, equities began the week with losses, oil prices rose and gold jumped to a six-year high (since April 2013), reflecting investors' anxiety over the threat of further violence in the Mideast.
Shipping interests in the Middle East are on high alert as the region braces for a possible escalation of the military conflict between the U.S. and Iran. Oil tankers appeared to be moving normally through the Strait of Hormuz and the Persian Gulf following the U.S. killing of Iranian military commander Qassem Soleimani.
— Mideast tension update:
- Iran said it was ending all its commitments to the 2015 nuclear deal and would no longer limit uranium enrichment, signaling the deal’s collapse as the fallout from the U.S. killing of Qassem Soleimani intensified.
- Iran says it will limit its response to the drone attack to U.S. military targets. “The response for sure will be military and against military sites,” Hossein Dehghan, the military adviser to Iran’s supreme leader, said in an interview with CNN. “The only thing that can end this period of war is for the Americans to receive a blow that is equal to the blow they have inflicted.” President Trump threatened Saturday to strike “52 Iranian sites . . . some at a very high level & important to Iran and the Iranian culture” should Tehran retaliate against Americans or U.S. interests in the region. Iran has 24 locations on the U.N. list of cultural world heritage sites. If Trump were to carry out his threats, Dehghan said, “no American military staff, no American political center, no American military base, no American vessel will be safe.”
- Trump threatens sanctions after Iraqi parliament votes to expel U.S. troops. President Trump threatened Iraq with sanctions, saying the U.S. will not leave unless the country repays billions for joint air base. Speaking to reporters on Air Force One, Trump said the U.S. would put “very big sanctions on Iraq” if the country forced out U.S. troops. “If they do ask us to leave, if we don’t do it in a very friendly basis. We will charge them sanctions like they’ve never seen before ever,” Trump said. “It’ll make Iranian sanctions look somewhat tame.” Meanwhile, State Department spokeswoman Morgan Ortagus said Washington was “disappointed” by the Iraqi lawmakers’ move, and urged them to reconsider as the U.S. seeks “further clarification on the legal nature and impact of today’s resolution.” “We believe it is in the shared interests of the United States and Iraq to continue fighting ISIS together,” she said, using an acronym for the Islamic State.
- Dozens of Iranians and Iranian-Americans were held for hours at the U.S. border with Canada over the weekend as America increased security.
- It’s hard to predict what will come next. “There’s a whole universe of possibilities now,” including Iranian retaliation against U.S. forces and kidnapping of Americans, the retired U.S. general David Petraeus told the New Yorker.
— A Chinese trade delegation is planning to travel to Washington on Jan. 13 for the signing of the U.S./China Phase 1 trade deal, the South China Morning Post (SCMP) reported on Sunday citing a source briefed on the matter. The Chinese delegation will return on Jan. 16, SCMP said. The trade delegation, led by Vice Premier Liu He, had originally planned to set off earlier in the month but had to change plans after President Donald Trump sent a tweet about the topic.
A signing ceremony, according to President Trump, will take place on Jan. 15 at the White House. Trump says he will begin Phase 2 talks later in Beijing.
— China sacked its top man in Hong Kong. Wang Zhimin, head of the Central Liaison Office, has watched as the territory has become consumed by months of pro-democracy, anti-Beijing protests. He will be replaced by Luo Huining, the Communist Party’s chief in Shanxi province, where he spearheaded the party’s campaign to root out corruption.
— China’s services sector expansion slows. The Caixin/Markit services PMI for December was at 52.5 after a 53.5 reading in November. That still is in expansion territory and is up from the eight-month low registered in October. The Caixin/Markit reading reflects the slowing pace registered last week in the official services PMI update issued by the National Bureau of Statistics. Within the Caixin/Markit reading were concerns of continued subdued economic activity in China as the outlook for business activity declined to its second lowest mark on record since the index began in 2005.
— With House Speaker Pelosi still withholding Trump impeachment articles, odds rise the Senate could consider USMCA this week. The Senate Finance Committee on Tuesday is set to mark up the U.S.-Mexico-Canada Agreement (HR 5430), Chairman Chuck Grassley (R-Iowa) said in a statement last week. Senate Majority Leader Mitch McConnell (R-Ky.) previously said the first item that will be on the floor after the impeachment trial will be the North American trade revamp. McConnell said the trade deal could consume more than two weeks of floor time. The House passed the legislation Dec. 19 on a 385-41 vote. However, with the House impeachment articles still being held off by House Speaker Nancy Pelosi (D-Calif.), that could give the Senate chamber time to consider the USMCA. White House trade adviser Peter Navarro said Sunday on Fox Business that the full Senate could pass the measure before the end of the week. "Possibly this week we could actually do some great people's business. Dairy farmers in Wisconsin will rejoice, auto workers in Detroit, everyone in between,” Navarro said.
— France warns U.S. against digital tax retaliation. France warned the U.S. it will face retaliation from the EU if it tries to impose “highly disproportionate” trade tariffs in response to its digital tax on companies including Google and Amazon. In a letter to U.S. Trade Representative (USTR) Bob Lighthizer on Jan. 3, Bruno Le Maire, the French finance minister, said that “if the U.S. were to decide to impose trade sanctions against the EU over the French Digital Services Tax, it would deeply and durably affect the transatlantic relationship at a time when we need to stand united.” France is “in touch with the European Commission and other EU Member States on the subject” and they are “contemplating the various options to defend our trade rights in a proportionate and determined manner, as we have in the past,” the minister wrote.
Le Maire is scheduled to meet the EU trade commissioner Phil Hogan on Tuesday morning in Paris and will discuss the options on the table.
The USTR will be holding a public hearing on Tuesday about the proposed tariffs in retaliation for France’s digital services tax. In December, after publishing a 93-page report on the French tax, Lighthizer said that he was exploring retaliation against what he described as the “growing protectionism” of European countries that “unfairly targets U.S. companies.”
Le Maire's letter noted he contested Lighthizer's conclusion, insisting that the current tax does not discriminate against U.S. digital companies, is compliant with WTO rules and would be withdrawn once agreement on an international tax was agreed with the OECD. He said any dispute should go through the WTO and asked that “U.S. authorities suspend their proceedings and cease to contemplate unilateral tariffs that are neither warranted, nor proportionate, nor adequate to address this issue.”
But U.S. Treasury Secretary Steven Mnuchin recently walked back U.S. support for the OECD plan, saying it had “serious concerns.”
— Net domestic migration in U.S., 2018-2019
Source: U.S. Census Bureau
— Illinois farmer captures financial, income and price pressures in the ag sector. An Illinois farmer emails: “My yields were off about 10% this year on our 3,200 acre operation and no prevented planting. I feel pretty good because many producers had larger yield loses. We were lucky. With that said, the MFP payments were vital in our family operation on getting all the bills paid and bankers paid back. Trouble is, there is still a group of producers even with MFP that are going to come up short. My 2019 projected cash flow was one of the roughest I ever had to put together last year. My 2020 projected looks to be improved. Fertilizer cost is down compared to 2019 and I am projecting hopefully better prices with trade agreements about to cross the finish line.”
— Other items of note:
A new CBS News poll shows a three-way tie among Democrats in Iowa, with Bernie Sanders, Joe Biden and Pete Buttigieg each at 23% support (link). Elizabeth Warren at 16% and Amy Klobuchar at 7% rounded out the top five, before Iowa voters attend the caucuses on Feb. 3. In New Hampshire, the second state to hold a 2020 nominating contest, Sanders was in the lead at 27% to Biden’s 25%, with Warren at 18% and Buttigieg at 13%. Meanwhile, five Democrats — Biden, Buttigieg, Sanders, Warren and Warren and Klobuchar — have qualified for the next debate, on Jan. 14 in Iowa.
Perspective from a long-time Democrat and vice-presidential candidate on the killing of a top Iranian general. Link.
Roe to retire. Rep. Phil Roe (R-Tenn.) said in a statement Friday that he will retire at the end of 2020. He said he looks forward “to finishing my term strongly for the East Tennesseans that I love representing.” Roe’s district, Tennessee’s 1st, is one of the most Republican-leaning in the U.S. and voted for Trump by a 77% to 20% margin in 2016.
EPA will begin seeking public input today on new rules (to be proposed early this year) that will significantly decrease emissions of smog-forming nitrogen oxide and other pollutants from heavy-duty trucks. The Truck and Engine Manufacturers Association, which represents the four largest truck makers in North America, is backing the initiative and said it wants a national program with "sufficient regulatory lead time, stability and certainty." The EPA last toughened NOx standards for highway heavy-duty trucks and engines in 2000.
Britain reportedly plans to push the EU to speed up trade negotiations to wrap up a Brexit deal by December. Link to Financial Times article.
— Markets. Economists polled by the Wall Street Journal forecast gross domestic product will advance 1.8% this year, down from an estimated 2.2% growth in 2019 and 2.9% in 2018. The economy is slowing but odds of a recession appear low.
Federal Reserve Bank of New York President John Williams said Sunday that low global interest rates are here to stay. “There’s been a process of going through the stages of grief about a low neutral rate,” he said. “These factors are basically the hand we’ve been dealt for the next five to 10 years.” Fed officials must hold themselves accountable to their 2% inflation target and be transparent about how they are going to get there, he said. Making sure inflation expectations don’t slip too far is also important, he said. Inflation expectations affect actual inflation in the future. Williams also said the Fed’s response to inject liquidity into financial markets following a cash crunch in September had been successful. The Fed’s effort to stabilize the market for short-term loans among financial institutions “has worked exactly as we wanted,” he said. “As the level of reserves have been brought back to the appropriate level, we’ve seen money markets operate very smoothly,” he said.
San Francisco Fed President Mary Daly suggested officials could let inflation run higher in good times to make up for inflation shortfalls in downturns. “A new policy framework is likely to be required,” she said.
Former Federal Reserve Chairman Ben Bernanke said the Fed could once again use asset purchases and explicit communication to boost the economy in a downturn. Those two tools represent the equivalent of 3 percentage points in rate cuts, he said. Link to New York Times article for details.