Travelling day. Actually, they will all be travelling days for a few more days.

U.S., China Move Forward on Trade The U.S. and China took an initial step to cement a trade agreement that had been derailed, with Washington saying it would shelve a planned increase in tariffs on Chinese goods, while Beijing would buy more U.S. farm products.

(…) The rough framework hashed out in two days of talks between senior U.S. and Chinese officials in Washington included a Chinese agreement to purchase American farm products totaling $40 billion to $50 billion, President Trump said, without specifying over what time period that would occur. (…)

In exchange, the Trump administration said it would forgo a planned increase in tariffs to 30% from 25% on $250 billion in annual imports from China scheduled to go in place next week. (…)

The planned tariff increases in December on electronics, apparel and other imported consumer goods—a big uncertainty for many U.S. firms—haven’t been shelved so far, Mr. Trump’s trade adviser, Robert Lighthizer, said in the Oval Office. (…)

The two countries said they made progress on intellectual-property protection and rules to prevent currency manipulation, U.S. officials said Friday, though they declined to offer specifics. Treasury Secretary Steven Mnuchin this February claimed to have already reached a currency agreement with China and cited it as sufficient to delay an earlier round of tariffs.

Mr. Trump—facing a slowing U.S. economy and an impeachment investigation in Congress—said the progress could lead to a “substantial phase one deal” that he and Mr. Xi could sign in November at a coming summit of Asia-Pacific leaders. (…)

The details of the agriculture deal are rough. If China increases purchases of U.S. agricultural goods by $40 billion to $50 billion in a year, that would mark substantial gains. In 2017, before the trade war started, China purchased about $24 billion a year of U.S. food and agricultural exports. If the promised sum is spread out over some longer period of time, it is less significant. (…)

Mr. Trump laid out a schedule for finishing up a first phase of a deal with China in the coming weeks. Under that plan, there would be one or two subsequent phases of negotiations taking place over some unspecified period of time. Rules on safeguarding intellectual property in China are mostly done, but some will be included in phase two, he said. The coercive transfer of foreign companies’ technology in China may span phases two and three. (…)

On Friday, Mr. Lighthizer said Huawei’s fate is being handled as a separate process. (…)

Major issues unresolved:

• Tariffs of 15% are still scheduled to be imposed on $156 billion of Chinese imports on Dec. 15, barring further progress in the talks.
• The U.S. didn’t announce any relaxation of restrictions it has imposed against Chinese telecommunications giant Huawei.
• The U.S. said China would agree to better protections for U.S. intellectual property. President Trump said this would be addressed later.
• The U.S. wants China to agree to a pact not to manipulate its currency. Treasury Secretary Steven Mnuchin said a pact was “almost complete.”
• The U.S. wants China to restrict the practice of requiring American companies to share technology with Chinese partners in exchange for access to the market. Mr. Mnuchin said they had made “good progress” but hadn’t reached a deal.
• The U.S. had hoped China would take actions to rein in state-owned companies, but no progress was cited.
• U.S. negotiators have pressed China to change rules on information security, cross-border data flows and high-tech sectors such as cloud computing, but no progress was cited.
• Existing tariffs from both sides remain in place with no mechanism to unwind.
• Both sides have said they want a way to ensure compliance. The U.S. said there will be a consultation process, but no details have been announced.

• Trump’s China Deal Yields Plenty of Questions, and Critics

(…) But even if it gels in the way that Trump outlined Friday, the agreement is far smaller in scope than what the president himself once envisioned, or what was on the table when talks broke down in May. (…)

The contours of the deal unveiled Friday look very similar to ones negotiated by Treasury Secretary Steven Mnuchin and even Commerce Secretary Wilbur Ross that were rejected by Trump over the past two years, said Wendy Cutler, a longtime former U.S. trade negotiator who now heads the Asia Society Policy Institute.

“It looks more like a ‘light’ deal than a ‘substantial’ deal,” Cutler said, and remains at risk of being weakened further as negotiators put it down on paper in the weeks to come.

After months of escalation, Trump compromised this week and offered a tacit embrace of something he has resisted for months: A partial deal that might yet grow into something more comprehensive but could take as many as three separate phases of negotiations. (…)

“I’m skeptical that there is anything that could be objectively called a deal,” said Scott Kennedy, an expert on the U.S.-China economic relationship at the Center for Strategic and International Studies in Washington. “It appears that the U.S. was looking to find a way to avoid raising tariffs in the next couple months and reassure financial markets, and so it was willing to accept only an oral agreement on a narrow range of issues to take this step. Xi Jinping has to be quite satisfied with this outcome.” (…)

On the issue of currency manipulation, another longstanding U.S. complaint, Mnuchin on Friday said only that there had been new commitments on transparency and that the U.S. was willing to review its August designation of China as a currency manipulator. (…)

China’s official statement and the main state media didn’t call this “a deal”. According to Bloomberg, the Ministry of Commerce said that “the two sides have made substantial progress” in a number of areas and “agreed to work together in the direction of a final agreement.” No acknowledgement of a promise to buy $40-50 billion worth of ag products over two years as Trump said.

On tariffs, the negotiation result is disappointing. All recent tariff hikes remain in place. Only the announced 5 percentage point hike on US$250bn of annual US imports from China, planned for this Tuesday, is taken out. Not even the announced 15 percentage point hike in December is rolled back. Apparently the US negotiators are not close enough to a deal yet to be able to diminish the pressure on China and relieve exporters around the world. (ING)

It would be surprising that China would give up its main economic and political leverage with so little in return.

As ING concludes, “since the start of the negotiations with China, optimism from President Trump has at various times been followed by serious setbacks in the negotiations.”

As Trump often says, we’ll see what happens.

America Is Losing the Chinese Shopper China was once eager to spend on U.S. brands. Then citizens of the world’s biggest country shifted their allegiances.

(…) “Now the quality is similar, so why not buy China?” said Gao Yang, 39, who works in home decoration, as he browsed in a Beijing mall. (…) Chinese brands are getting stronger [and] Chinese consumers are increasingly turning away from foreign brands because they have run afoul of Chinese politics. The result is that some American brands that used to be cool are falling out of fashion. (…)

The willingness of Chinese consumers to keep buying foreign products matters more to the global economy than ever. China now contributes roughly a third of global growth, and is the world’s second biggest source of household wealth, according to Credit Suisse. China is expected to surpass the U.S. as the world’s biggest consumer market in 2021, according to New York-based research firm eMarketer, with analysts predicting China will have more than $5.8 trillion in retail sales. (…)

As the Chinese economy shifts inward, McKinsey predicts between $22 trillion and $37 trillion of economic value—or between 15% and 26% of global gross domestic product—could disappear as supply chains shrink and other changes ripple through the global economy. (…)

Some Western brands have thrived by tweaking their products to make them feel more Chinese. After initially losing market share to an upstart Chinese coffee chain called Luckin Coffee that emphasized delivery counters and smartphone transactions, Starbucks Corp. has prioritized more local flavor, including opening a store in Tianjin in a historic building designed by a Chinese architect. The company worked with preservationists to retain everything from a giant glass dome to the original counters once belonging to the Zhejiang Xinye Bank. It also added a tea bar with marble countertops that it says demonstrates “deep respect for thousands of years of tea tradition.”

Its results have improved in part because of initiatives that are similar to those of its local competitor—a large number of new locations, delivery service and stores for people “on-the-go.” (…)

In a Brunswick Group survey conducted in June, 56% of Chinese consumers said they’ve avoided purchasing an American product to show support for China’s position in a continuing trade war with the U.S. A Credit Suisse survey last year found that more than 90% of Chinese consumers between ages 18 and 29 would prefer to buy domestic appliances. (…)

Surveys show many now want products that express something about their identities—which increasingly involve pride in being Chinese.

Hollywood studios are among those affected. Last year for the first time, China’s top five grossing films were all Chinese. Recent blockbusters have included Operation Red Sea, based on a 2015 mission to rescue Chinese citizens in Yemen, and Wolf Warrior 2, a 2017 action film that features China as a benevolent force inside Africa.

American studios have responded by attempting to do more projects jointly with Chinese backers, though that risks eroding Hollywood’s role in dominating global popular culture. IMAX’s chief executive, Rich Gelfond, summed up what he thinks it takes to succeed in China nowadays: “Be as Chinese as you can be. Try to make it a win-win situation. Play for the long-term.” (…)

Many foreign luxury brands still post strong results in China. But McKinsey warns that among younger consumers, barely half of luxury buyers now care about brand names, with a growing number purchasing Chinese products. Among their parents, virtually none would have considered anything Chinese luxurious.

Western luxury brands faced consumer boycotts in August for labeling Hong Kong as a separate entity from China. Versace, Coach and Givenchy were among the foreign brands that posted apologies on Chinese social media.

Related:

• AMERICA CURSED

• “OPEN SESAME!” MOMENTS

U.S. Inflation Cooled at the End of the Summer Decline in energy and used-vehicle prices holds down broader inflationary pressures

U.S. consumer prices were flat in September, as a decline in energy and used-vehicle prices held down broader inflationary pressures, after rising a seasonally adjusted 0.1% in August, the Labor Department said Thursday.

Excluding the volatile food and energy categories, so-called core prices rose 0.1%, moderating from a 0.3% increase in August.

In the 12 months through September, overall prices rose 1.7%, while core prices were up 2.4% on the year. Gasoline and used-car prices both posted large declines, though those categories can be volatile. (…)

The widespread narrative is that inflation is almost non-existent. Core CPI was up only 0.13% in September (+1.6% annualized) but that came after 3 months averaging +0.28% (+3.4% annualized). Here’s the quarterly trend, which might surprise you:

• The Cleveland Fed’s compilation shows no slowdown in all major inflation measures:

• The Cleveland Fed also provides daily “nowcasts” of inflation for two popular price indexes, the price index for personal consumption expenditures (PCE) and the consumer price index (CPI). Nowcasts are estimates or forecasts of the present. The inflation nowcasts are produced with a model that uses a small number of available data series at different frequencies, including daily oil prices, weekly gasoline prices, and monthly CPI and PCE inflation readings. The model generates nowcasts of monthly inflation, and these are combined for nowcasting current-quarter inflation. As with any forecast, there is no guarantee that these inflation nowcasts will be accurate all of the time. But historically, the Cleveland Fed’s model nowcasts have done quite well—in many cases, they have been more accurate than common benchmarks from alternative statistical models and even consensus inflation nowcasts from surveys of professional forecasters.
• The most recent nowcast sees October core inflation in a range similar to recent months:

• The Atlanta Fed’s sticky-price consumer price index (CPI) — a weighted basket of items that change price relatively slowly — rose 2.4 percent (on an annualized basis) in September, following a 3.5 percent increase in August. On a year-over-year basis, the series is up 2.7 percent. On a core basis (excluding food and energy), the sticky-price index rose 2.4 percent (annualized) in September, and its 12-month percent change was 2.6 percent. The flexible cut of the CPI —a weighted basket of items that change price relatively frequently — decreased 5.3 percent (annualized) in September, and is down 0.4 percent on a year-over-year basis.

MANUFACTURING GREEN SHOOTS?

Global copper users output strengthens, but demand pressures remain weak

While the global manufacturing sector has stalled in 2019 so far, a revival of optimism in the copper-using industry could fuel a wider improvement during the final quarter. Countermeasures to US tariffs have contributed to a rebound at Asian manufacturers using the metal meaning that, although demand pressures remain weak and still point to falling copper prices, there is a chance of some relief to the current slowdown.

The IHS Markit Global Copper Users PMI^TM is a composite indicator giving an overview of operating conditions at specific manufacturers identified as heavy users of copper. It is based on data provided by companies around the globe. As many copper users are producers of primary manufacturing goods, the index measuring output levels can also provide an indication of the direction of global manufacturing output.

The Global Copper Users PMI rose above 50.0 during September, indicating the first improvement in business conditions since November 2018. Key to the upturn was a moderate expansion in output, the fastest for a year, as firms looked to build stocks of manufactured goods in hopes of stronger future demand levels.

On a regional basis, Asian copper users have seen the greatest change in the trend for output this year. Production in the second half of 2018 was mired by the introduction of US tariffs on Chinese goods, causing a downturn in new orders and subsequent cut-backs to output across the region. China responded with fiscal stimulus measures to ease tax burdens on manufacturers, which helped to soften the decline and, more recently, lift production levels.

As Asia accounts for a large proportion of the global copper-using industry, this has had a notable impact on global output levels and could signal a boost for the world manufacturing sector. Historically, the Global Copper Users PMI Output Index has correlated strongly with the Global Manufacturing PMI Output Index, so the latest upturn in copper use offers some optimism that this could transform into higher output in other industrial sectors. That said, caution is needed, as Asia copper PMI data have shown greater volatility in recent times, particularly as Asian operating conditions have diverged from those seen in European and US markets.

Despite the overall improvement among copper users, the impact on prices is likely to remain subdued. The rise in new orders at Asian users in September was only marginal, while demand across the global copper-using industry declined as a result of weak conditions in European markets. Stronger output growth has therefore left manufacturers over-stocked, signalling that input buying may weaken during the fourth quarter unless demand levels improve. The new order-to-inventory ratio (derived from the Copper Users PMI data) suggests a downwards impact on prices, with the year-on-year change remaining negative. (…)

Either way, the underlying PMI picture has become more positive, suggesting a possible rebound in the Asian copper-using industry, albeit one that is likely to leave prices subdued for now. Upcoming data releases will confirm whether higher output levels can be maintained, or whether demand stagnates again.

TECHNICALS WATCH

Markets jumped on last week’s “rapprochement” but Lowry’s Research is rising a yellowish flag. “An important theme in the Lowry Analysis is that price alone can often be a misleading guide regarding the strength or weakness of the equity market. Rather, it is the forces of Supply and Demand behind the movement in prices that provide a more
reliable measure of whether prices are headed higher or lower.”

Its analysis of supply and demand in recent weeks suggests “no expansion in short-term Demand to support the price gains. At the same time, Supply contracted much more slowly in the rally than it had expanded on the sell-off (…)”. Lowry’s says that demand needs to show up strongly early this week to reverse the recent worrying trends.

It seems that short covering was in action last week. Will real demand show up now?

The Q3 earnings season begins this week.

EARNINGS WATCH

The most recent facts from Refinitiv/IBES:

Through Oct. 11, 23 companies in the S&P 500 Index have reported earnings for Q3 2019. Of these companies, 91.3% reported earnings above analyst expectations and 4.3% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 5.1% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.

Of these companies, 56.5% reported revenues above analyst expectations and 43.5% reported revenues below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 59% of companies beat the estimates and 41% missed estimates.

In aggregate, companies are reporting revenues that are 0.7% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 0.9%.

The estimated earnings growth rate for the S&P 500 for 19Q3 is -3.2%. If the energy sector is excluded, the growth rate improves to -1%. The estimated revenue growth rate for the S&P 500 for 19Q3 is 3.5%. If the energy sector is excluded, the growth rate improves to 4.6%.

The estimated earnings growth rate for the S&P 500 for 19Q4 is 3.5%. If the energy sector is excluded, the growth rate improves to 5.6%.

Note that the 23 companies that have already reported had a 10.5% decline in profits in Q3, compared with –10.7% in Q2 (+5.6% surprise factor) and –4.6% in Q1 (+4.5% surprise factor).

Importantly, revenue growth slowed significantly, from +5.4% in Q1 to +3.3% in Q2 to +2.7% in Q3. Of these 23 companies, 13 are consumer-centric, 5 industrials and 5 IT. The above mentioned revenue growth estimate of +4.6% in Q3 (ex-Energy) looks high however.

We have had preannouncements from 123 of the S&P 500 companies for Q3 and they were generally more encouraging than during Q2. From that lens, Q3 results don’t look bad, even though revenue growth is slowing fast. Company comments on Q4 trends will be scrutinized.

But analysts keep reducing estimates, across the board:

On a global basis, Charles Schwab’s Liz Ann Sonders notes that 41 of the 1,650 companies in the MSCI World Index have reported third quarter earnings.

(…) it is interesting to note that while the consensus estimate for earnings this quarter is a -5% year-over-year decline, early results show that 69% of companies have exceeded analyst estimates. As such, the current positive earnings surprise of 5% may offset the expected -5% decline and mark another quarter of flat earnings per share for global companies.

Liz Ann points out that estimates for 2020 shoot for similar growth in the United States, Europe, and Asia at 10.99%, 10.43%, and 10.32%, respectively. Laughable!

With inflation steady at 2.4%, earnings need to deliver in coming weeks. The S&P 500 is now 3.8% above the Rule of 20 Fair Value (2861). Fair Value is the central value around which valuation fluctuates. It has been declining since the end of June (yellow line).