Fed Chairman Powell Testifies Before House Panel

Posted on 07/10/2019 6:27 AM

Trump reportedly gave China's Xi a key concession to revive trade talks

Trader focus today is on testimony from Fed Chairman Jerome “Jay” Powell, who will appear before the House Financial Services Committee this morning. Observers will listen to see if Powell signals a coming rate cut as an attempt to buffer the U.S. from the effects of trade disputes and a global slowdown. At his most recent press conference, Powell took a doveish tone, saying the Fed would “act as appropriate to sustain the expansion.” Investors have taken that to mean interest-rate cuts are coming. According to the CME Fedwatch tool, investors are assigning a 96% probability to a quarter-point reduction in rates at the Fed’s next meeting. The Fed today will also publish its June meeting minutes from the FOMC's last rate decision, offering new detail on how officials judged growing risks from trade uncertainty before last month's G20 summit in Japan.
     In a clear signal President Trump wants a trade accord with China, the Financial Times reports that Trump reportedly told President Xi Jinping of China last month that America would tone down criticism of Beijing’s handling of Hong Kong to revive trade talks. The U.S. government said it will also issue licenses to companies seeking to sell goods to China's Huawei where there is no threat to national security. Meanwhile, U.S. Trade Representative Bob Lighthizer and Treasury Secretary Steven Mnuchin spoke on the phone with Vice Premier Liu He and Commerce Minister Zhong Shan yesterday in the first confirmed contact between the two parties since Trump and Xi met at the G20. Both sides said dialogue would continue without outlining next steps. White House economic adviser Larry Kudlow said officials are planning more meetings but that no details have been confirmed.
     The IAEA holds an emergency meeting on Iran. The UN nuclear agency will meet, at Washington’s request, to discuss Iran breaching the uranium enrichment limits set in a 2015 nuclear agreement from which the U.S. withdrew last year.
     Kim Darroch resigns as U.K. ambassador to the U.S. Kim Darroch, Britain’s ambassador to the U.S., has resigned following the leak of confidential diplomatic cables in which he criticized President Donald Trump. In a letter to Simon McDonald, head of the U.K. Foreign Office, Sir Kim, 65, said: “Since the leak of official documents from this embassy there has been a great deal of speculation surrounding my position and the duration of my remaining term as ambassador. I want to put an end to that speculation. The current situation is making it impossible for me to carry out my role as I would like."
     A federal judge ruled that President Trump can’t block critics on Twitter.


U.S./China trade policy update:

  • Trump eased stance on Hong Kong protests to revive trade talks. President Donald Trump told Chinese president Xi Jinping last month that the U.S. would tone down criticism of Beijing’s approach to Hong Kong following massive protests in the territory in order to revive trade talks with China. Trump made the commitment when the two leaders met at the G20 summit in Osaka, Japan, the Financial Times reports, citing several people familiar with the meeting. One person said Trump made a similar pledge in a phone call with Xi ahead of the G20 summit. The White House and state department declined to comment.
  • U.S. announces major relaxation of Huawei ban. Commerce Sec. Wilbur Ross on Tuesday said Washington would issue licenses to companies to sell their products to the Chinese telecoms equipment maker under certain conditions. “To implement the president’s G20 summit directive two weeks ago, [the US Department of] Commerce will issue licenses where there is no threat to U.S. national security,” Ross said. But he stressed Huawei would not be removed from the so-called entity list, and that companies would still need to apply for a license. “Within those confines we will try to make sure that we don’t just transfer revenue from the U.S. to foreign firms,” Ross said. “Huawei itself remains on the entity list, and the announcement does not change the scope of items requiring licenses from the Commerce Department, nor the presumption of denial.” Meanwhile, Larry Kudlow, an economic adviser to the U.S. president, said the licensing requirements would be relaxed but only “for a limited time period.” Some observers note the possibility that licenses could dry up once more if there is no progress in the trade talks.
  • Taiwan’s President Tsai Ing-wen is due in America on Thursday, and China is watching. The White House approved arms sales worth $2 billion to Taiwan, to China’s annoyance. China’s foreign ministry called for the order of missiles, tanks and other equipment to be cancelled. China claims Taiwan as its own and has become ever more irritated at the Trump administration’s strengthening relations with the island-state.
  • Top trade negotiators from the two countries resumed talks on Tuesday by phone. U.S. Trade Representative Bob Lighthizer and Treasury Secretary Steven Mnuchin spoke with the Chinese vice premier, Liu He, and commerce minister, Zhong Shan, yesterday to continue negotiations.
  • Kudlow: U.S. could reach a deal with China on trade but they also may not be able to get due to the difficult final issues that must be resolved. National Economic Council Director Larry Kudlow in an interview with CNBC, said, "It's like being on the seven-yard line at a football game. And as a long suffering New York Giants fan, they could be on the seven and they never get the ball to the end zone." Echoing comments from Mnuchin earlier that the two sides had worked out 90% of the issues between them, Kudlow stated, "When you get down to the last 10%, seven-yard line, it's tough.” But the fact that the two sides are talking is a positive, Kudlow observed, adding that President Donald Trump has told administration officials he wants a deal and that Chinese President Xi Jinping wants a deal as well. "Our team, time and again, asked for the change in Chinese laws and resistance mounted on that point," Kudlow stated. "They seem to believe that the State Security Council, or the Politburo, can promulgate regulations and that would be sufficient. We don't agree." As for the commodity purchases mentioned by Trump in Osaka, Japan, Kudlow said, “President Xi is expected, we hope in return for our accommodations, to move immediately, quickly, while the talks are going on, on the agriculture (purchases)," he said. "That's very, very important." As for what products, Kudlow said, "Soybeans, wheat and energy, possibly. That's very, very important.” Asked by reporters about the timeline for purchases or getting a deal, Kudlow said, "No timeline. Quality not speed.”
  • China sources: No trade agreement with U.S. if current tariffs remain. The lifting of U.S. tariffs is reportedly a must U.S. move stressed by Chinese leader Xi Jinping. But Max Baucus, the top U.S. envoy in Beijing from 2014 to 2017, said on the sidelines of a U.S./China trade relations event in Hong Kong that it would be difficult for the world’s two largest economies to cancel their existing tariffs on each other’s products. “We have a new normal that the tariffs will continue in the indefinite future,” Baucus, also a former Democratic senator from the agricultural state of Montana, told the South China Morning Post. “It’s very hard to roll back tariffs once they’re imposed. Both countries’ tariffs that exist today will continue for some time,” he said during the forum, attended by former senior officials including China’s former vice-premier Zeng Peiyan and Japan’s former prime minister Yasuo Fukuda.

Chinese academic warns of China's livestock sector's weaknesses: epidemics, reliance on imports for core inputs, low productivity and high costs. The comments by agricultural economics Professor Wang Mingli of the Chinese Academy of Agricultural Sciences were reported by No. 1 Business News on the release of his institute's report on challenges and countermeasures for supply-side structural reform in the agricultural sector.

According to Wang, livestock accounts for 28% of the value of China's agricultural output, and perhaps as much as 40% (likely including feeds, fodder crops, and related activities). There is much room for growth, he said, because China's per capita availability of meat, dairy, and egg products is still much less than in developed countries. Wang said the growing share of China's agricultural sector is irreversible.

Wang acknowledged barriers facing the sector's development, including rising pork prices that are the "shadow" of disease epidemics such as African swine fever. He recited a chronology of major livestock disease outbreaks in China:

   * 2004: Highly-pathogenic avian influenza ravaged China's poultry flocks, causing large losses for farmers.
   * 2005: Streptococcus Sui broke out in Sichuan Province's swine herd.
   * 2006: Highly-pathogenic Porcine Reproductive and Respiratory Syndrome ("blue ear disease") first broke out in several southern provinces and spread nationwide, impeding healthy development of the hog industry, pushing China's CPI upward, and attracting the attention of national leaders.
   * 2011: Porcine epidemic diarrhea virus killed off large numbers of piglets nationwide.
   * Fall 2012: Outbreak of H7N9 caused estimated losses of RMB 23 billion for the country's poultry industry by April 2013.
   * 2014: Another H7N9 outbreak caused estimated losses of RMB 40 billion for the poultry industry.
   * 2014: Epidemic of a sheep disease, Pestes de Petits, caused a drop in mutton prices and huge losses for sheep farmers.
   * 2018: African swine fever was first officially reported in China, spreading to every province in less than a year.

Wang estimated this year's reduction in pork output at 10%, citing farmers' hesitance to restock farms, big financial losses despite expectations of good prices, and stressed the importance of building the veterinary system and ramping up production of alternative meats to fill the shortfall in pork supplies. He also warned that disease impacts on livestock markets do not dissipate easily and can last three to five years or even a decade or more.

Kudlow says administration will not send USMCA legislation until green light from Pelosi. The statement made by U.S. Trade Representative Robert Lighthizer previously that the administration will not send the implementing language to Congress for the U.S.-Mexico-Canada Agreement (USMCA) until House Speaker Nancy Pelosi (D-Calif.) says to do so still stands, according to National Economic Council (NEC) Director Larry Kudlow. In an interview Tuesday, Kudlow said, “Lighthizer has said that we will submit formal legislation when she gives the green light on the vote.”

Kudlow also spoke positively about Pelosi’s efforts so far to work with the administration on concerns Democrats have with the trade deal. "I think it will happen sometime this summer, hopefully," Kudlow said. "It could stretch onto the autumn, but I think it will be sooner than that. It's up to her, not me."

Other items of note:

  • Migrant arrests at the U.S./Mexico border dropped. Detentions fell 28% in June after reaching a 13-year high in May. Officials credited the decrease to Mexico’s troop deployment, at the Trump administration’s urging, to try to prevent migrants from reaching the border. Higher temperatures may also have contributed. Others note that arrests typically decline at this time of the year.

  • President Trump violated the constitution by blocking those whose views he disliked from his Twitter account, a federal appeals court ruled. It said the First Amendment forbids a public official to operate in such a way on a platform used to conduct government business. The case was brought by the Knight First Amendment Institute at Columbia University on behalf of seven blocked Twitter users.

  • Justice Dept. watchdog is preparing to deliver verdict on the Russia investigation. Investigators for the inspector general recently interviewed Christopher Steele, the former British spy, as they try to determine whether the F.B.I. misstepped in the inquiry. Link to New York Times article.

  • Reuters: Bayer is reportedly in talks with Elanco to merge their animal health businesses. Link to Reuters article, which says the two companies are working with banks to ensure any merger would secure regulatory approval.

  • House antitrust subcommittee has asked executives from Amazon, Apple, Facebook and Google to testify at a hearing on “online platforms and market power” next week.

  • The world’s second-largest container shipping company faces a major loss as a result of one of the biggest drug hauls ever at a maritime port. U.S. authorities are considering whether to seek the forfeiture of the Mediterranean Shipping Co. vessel seized at the Port of Philadelphia, the Wall Street Journal reports (link). The MSC Gayane is being held following last month’s seizure of some 20 tons of cocaine with a street value of $1.3 billion. Remaining containers have been transferred to other vessels for delivery to customers. With capacity for about 10,000 shipping containers and a value of about $90 million, the Gayane would mark a significant loss for MSC and ship owner J.P. Morgan Asset Management. “Drug seizures on cargo vessels aren’t exactly rare — two other MSC ships were found with illicit shipments in the U.S. earlier this year but the ships moved on. Prosecutors are treating this case differently,” the WSJ article noted.

Markets. The Dow on Tuesday eased 22.65 points, 0.08%, at 26,783.49. The Nasdaq rose 43.35 points, 0.54%, at 8,141.73. The S&P 500 was up 3.68 points, 0.12%, at 2,979.63.

China producer prices flat in June, consumer inflation holds steady, but pork prices grew at fastest pace in three years amid African swine fever outbreak. Food prices rose 8.3%, led by a 21.1% surge in pork prices, China’s preferred meat, and as fruit prices surged 42.7% due to bad weather and low prices last year. China's Ministry of Agriculture and Rural Affairs said last week that the incidence of the disease had “slowed markedly” and that pig production was gradually returning to normal. Yu Kangzhen, vice-agriculture minister, said there had been 143 outbreaks since the first reported case in August 2018 with a total 1.16 million pigs culled to date.

The European Commission cut its euro-area growth and inflation forecast for next year in its latest quarterly estimates. The projection comes as investors see a recession in Europe’s largest economy as almost inevitable, and amid rising expectations of further easing from the European Central Bank.


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