U.S., China to Hold Trade Talks in Effort to Ease Tensions Chinese and American officials plan to hold trade talks in Washington in early October, the latest attempt to tame a trade war that is rippling through the global economy.

Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke by phone on Thursday morning Beijing time and agreed to meet next month for high-level trade talks, state-run China Central Television said.

The U.S. side confirmed the phone call and said a high-level meeting would take place in Washington in the coming weeks. Both sides said deputy-level officials would work together in mid-September to lay the groundwork. (…)

Chinese state television said the two sides plan to work together and “create favorable conditions” for the negotiations. (…)

On Wednesday, China’s State Council called for the timely use of policy tools including a reduction in the amount of reserves banks have to hold, and for local governments to get ready earlier to issue bonds for next year, a move aimed at boosting infrastructure investment.

Reuters had a little more meat: China borrowed qualifiers from President Trump’s tweets:

“Both sides agreed that they should work together and take practical actions to create good conditions for consultations,” the ministry said.

“Lead negotiators from both sides had a really good phone call this morning,” ministry spokesman Gao Feng said in a weekly briefing. “We’ll strive to achieve substantial progress during the 13th Sino-U.S. high-level negotiations in early October.”

Gao also said Beijing opposes any escalation in the trade war.

Even more meat from the South China Morning Post:

(…) Taoran Notes, a social media account affiliated with the state-run newspaper Economic Daily, said in a commentary that officials from both countries might address each other’s core concerns in the coming days.

China has insisted that a trade deal should be equal and balanced, including removing tariffs and agreeing on reasonable quantities of Chinese purchases of US agricultural and other products.

“The upcoming trend, whether it will develop in a positive direction or repeat [previous tensions], will probably be decided by [the Americans’ actions],” it said. (…)

U.S. imposes duties on structural steel from China, Mexico The U.S. Commerce Department said on Wednesday it imposed duties on Chinese and Mexican structural steel after making a preliminary determination that producers in both countries had dumped fabricated structural steel on the U.S. market at prices below fair market value.

The department said it imposed duties of up to 141% on Chinese structural steel and up to 31% on Mexican structural steel and will begin collecting cash deposits for imports based on those rates.

Commerce said it had found that imports of Canadian fabricated structural steel did not violate U.S. anti-dumping laws.

Most Chinese steel products have largely been excluded from the U.S. market by prior Commerce Department anti-dumping duties and President Donald Trump’s 25% punitive tariffs. The latest order seeks to prevent Chinese downstream structural steel assemblies from skirting those duties and entering the United States. (…)

COMPOSITE PMIs

USA: Slowest increase in new business since March 2016

August data signalled a loss of momentum across the U.S service sector, with business activity rising at the softest pace since the current sequence of expansion began in March 2016. The slowdown in output was driven by only a marginal upturn in new business, the least marked since early-2016. Moreover, foreign client demand decreased. Subsequently, firms expanded workforce numbers only fractionally and the level of business optimism sank to a fresh series low. On the price front, input costs and output charges fell in August, with cost burdens decreasing for the first time since data collection began in October 2009.

The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 50.7 in August, down from 53.0 in July and slightly lower than the earlier ‘flash’ figure of 50.9. Although still signalling a marginal expansion in business activity, the rate of increase was the slowest in the current sequence of growth (beginning in early-2016) and well below the long-run series trend. A number of panellists suggested that a slower rise in new orders held back business activity growth.

New business growth eased from July’s solid pace to only a marginal rate in August that was the slowest since March 2016. Where firms experienced softer order books, they linked this to less robust corporate spending. That said, some continued to state that a further improvement in consumer demand was driving the sustained expansion. New export orders, meanwhile, decreased for the first time since January, and at the sharpest rate for almost three years.

At the same time, input prices decreased for the first time in the series history in August. Anecdotal evidence suggested the decline in costs was linked to the recent cut in interest rates and lower purchase prices. Consequently, service providers cut their selling prices at a modest pace. The decrease was the second in four months, but the fastest since data collection began in October 2009. Panellists stated that lower charges were linked to greater discounting in an effort to attract new clients.

Expectations towards business activity over the coming year hit a fresh series low, as firms expressed greater concerns surrounding ongoing trade wars and a slowdown across the wider economy.

In line with a slower expansion in new business, employment across the service sector rose at only a fractional rate in August. The rate of job creation was the softest since February 2010 as firms expressed greater reluctance to increase staffing, with the vast majority noting no change in workforce numbers.

Further reflecting excess capacity, service providers were able to clear backlogs for the first time in 2019 so far in August. Although only marginal, the rate of backlog depletion was the sharpest since June 2016.

The Composite PMI Output Index registered 50.7 in August, down from 52.6 in July, and signalling the slowest increase in output since the current sequence of expansion began in March 2016. The slowdown was led by muted upturns across the manufacturing and service sectors, with the latter registering a notably softer rise in activity.

Similarly, new business growth slowed to only a marginal rate that was the joint-weakest since data collection began in October 2009. A softer expansion was driven by a broad based private sector slowdown. Furthermore, total new export orders decreased at a solid rate.

At the same time, employment rose only fractionally in August as firms held off on increasing workforce numbers amid subdued client demand. The rate of job creation was the slowest since February 2010 as service sector firms signalled greater hesitancy around hiring. A softer expansion in new business was also reflected in a marginal fall in backlogs.

Business confidence across both the manufacturing and service sectors hit fresh series lows amid greater uncertainty surrounding trade wars and concern about a wider economic slowdown through 2019.

Finally, composite inflationary pressures fell in August, with input price decreasing for the first time since data collection began in October 2009.

Chris Williamson, Chief Business Economist at IHS Markit:

US businesses reported one of the toughest months since the global financial crisis in August, with growth of output, order books and hiring all slowing amid steep falls in both export and business confidence.

Only on two occasions since the global financial crisis have the US PMI surveys recorded a weaker monthly expansion, and these were months in which business was hit by the government shutdown and bad weather in 2013 and 2016 respectively. This time, trade wars and falling exports appear to be the main drivers of weakness, exacerbating fears of a broader economic slowdown both at home and globally.

At current levels, the August PMIs are indicating annualized GDP growth of 1.0%, putting the economy on course for growth of just below 1.5% in the third quarter. Such weak readings hint at downside risks to current third quarter growth projections, which generally point to an expansion of just over 2%.

A major factor behind the deterioration was the spreading of the manufacturing downturn to the service sector, via weakened household and business confidence. Jobs growth is also increasingly being affected by worries regarding the outlook. Overall jobs growth in August was the weakest since early-2012, commensurate with non-farm payrolls rising at a monthly rate of under 100,000.

The ISM has a very different reading:

The NMI^® registered 56.4 percent, which is 2.7 percentage points higher than the July reading of 53.7 percent. This represents continued growth in the non-manufacturing sector, at a faster rate. The Non-Manufacturing Business Activity Index increased to 61.5 percent, 8.4 percentage points higher than the July reading of 53.1 percent, (…). The New Orders Index registered 60.3 percent; 6.2 percentage points higher than the reading of 54.1 percent in July. The Employment Index decreased 3.1 percentage points in August to 53.1 percent from the July reading of 56.2 percent. The Prices Index increased 1.7 percentage points from the July reading of 56.5 percent to 58.2 percent, indicating that prices increased in August for the 27th consecutive month. According to the NMI^®, 16 non-manufacturing industries reported growth. The non-manufacturing sector’s rate of growth rebounded after two consecutive months of cooling off. The respondents remain concerned about tariffs and geopolitical uncertainty; however, they are mostly positive about business conditions.

Growth of euro area private sector remains modest in August

The IHS Markit Eurozone PMI® Composite Output Index signalled the continued expansion of the euro area private sector during August. Growth nonetheless remained modest, despite improving slightly since July. After accounting for seasonal factors, the index posted 51.9, compared to 51.5 in the previous month. In line with the recent trend, there remained a historically marked divergence between the performance of the manufacturing and services economies. Whereas the latter expanded at a solid, and slightly faster pace, goods producers endured another period of falling output (the seventh in successive months).

At the national level, France performed best, with growth driven by a solid service sector performance and a renewed rise in manufacturing output. Spain also registered solid growth, and the fastest in four months, whilst modest gains in output were seen in both Germany and Ireland. Italy meanwhile was the only nation to experience a slowdown in growth compared to July and, by registering only a marginal rise in private sector output, was the weakest-performing nation.

The expansion of the euro area private sector reflected both an increase in new work and a sixth successive monthly fall in backlogs of unfinished business. Latest data showed that incoming new work increased, but only marginally as overall demand conditions remained fragile, especially for manufacturers and those exposed to export trade. Indeed, overall sales gains were weighed down by an eleventh successive monthly reduction in new export work, with the rate of contraction amongst the sharpest in five years of data collection.

With activity rising at a stronger rate than new business, backlogs of unfinished work were naturally reduced in August. Moreover, the rate of decline was the fastest recorded by the survey since November 2014. Evidence of spare capacity weighed on hiring during the latest survey period. Although employment continued to rise, extending the current period of growth to just under five years, the degree to which jobs rose was modest and the weakest since March 2016. August data showed higher employment across the single currency area. France recorded the strongest growth, and Spain the lowest.

Worries over the future also served to limit overall jobs gains. With concerns over the ongoing impact on activity of the continuing US-China trade war, plus mounting political uncertainties in Europe, confidence amongst euro area private sector companies fell to its lowest since May 2013.

Finally, operating expenses rose again during August, and to the greatest degree since May. Average output charges were increased in response, albeit only modestly.

The IHS Markit Eurozone PMI® Services Business Activity Index signalled a further solid increase of business activity during August. Remaining above the 50.0 no-change mark for a seventy-third successive month, the index recorded 53.5 in August compared to 53.2 in July. Germany and Ireland recorded the strongest gains in activity during August, followed by Spain. France recorded solid growth while Italy remained a notable laggard, registering only a marginal increase in activity since July.

Higher overall activity was supported by a combination of an increase in new work and a reduction in levels of work outstanding. Growth of new business was solid, but nonetheless the weakest in the past three months. Backlogs of unfinished business were lowered for the first time since March.

Meanwhile, employment growth was sustained in August, but at the weakest rate since the start of the year as worries about future activity grew. Confidence regarding activity in 12 months’ time was the joint-weakest recorded by the survey since June 2013.

Rising wage expenses underpinned another marked increase in operating costs during August. Inflation was the sharpest for three months. In contrast, average output charges increased at the slowest rate since May.

Chris Williamson, Chief Business Economist at IHS Markit:

Although up on July, the latest reading indicates that GDP will rise by just 0.2% in the third quarter, assuming no substantial change in September. Official data available so far for the quarter suggest growth could be even weaker. (…) A fierce manufacturing downturn, fuelled by deteriorating exports and most intensely felt in Germany, continues to be offset by resilient growth in the service sector, in turn propped up to a large extent by solid consumer spending in domestic markets.

The big question is how long this divergence can persist before the weakness of the manufacturing sector spreads to services and households. With jobs growth waning to the slowest since early-2016 a deteriorating labour market looks set to be a key transmission mechanism by which the trade-led downturn infects the wider economy. A sharp drop in business optimism about the coming year in the service sector, down to the joint-lowest for six years, suggests that companies are already braced for tougher times ahead.

Fed’s Beige Book Reports Modest Growth Despite Trade Uncertainty

(…) Consumer spending appeared mixed, with some districts reporting growth while others reported flat sales. The Atlanta Fed noted that retailers in its district saw “heightened uncertainty among consumers due to the geopolitical environment; they also expressed concerns about whether this uncertainty will impact consumer confidence and spending behavior during the upcoming holiday season.”

There were 62 mentions of tariffs, trade policy or related terms, up from 54 in the previous beige book, released July 17.

Reports about the impact of tariffs remained mixed. The New York Fed’s contacts in retail and auto sales said the effects on prices haven’t been noticeable. One of the Chicago Fed’s contacts predicted that new tariffs on Chinese imports wouldn’t start affecting retail prices until early 2020, while another reported that some retailers had already begun implementing “incremental” price increases.

Some companies reported that tariff-related uncertainty was hampering their investment plans. “Several contacts reported that both they and their customers had delayed capital spending as trade tensions and related uncertainty clouded their outlooks,” the Cleveland Fed said. Conversely, one electrical-equipment firm in the Boston Fed’s district said tariffs had led them to invest more in automating factories in the U.S. rather than moving them to Mexico.

Everybody is now focused on the consumer as the only potential savior of an economy where housing, ag, trade and manufacturing are in recession. But consumer spending is a coincident indicator. Monday, I wrote:

In fact, sequential growth in aggregate payroll income has been in the 3.0-3.2% range in the last 6 months, pointing to a slowdown in disposable income growth in the second half unless employment growth picks up, unlikely as things are now or unless Americans dip into their savings, especially if they decide to beat the tariffs tax coming. However, I would not hang my best hat on that iffy assumption. The savings rate has dropped from 8.8% last December to 7.7% in July, meaningfully boosting spending but it is now in line with last year’s average, although still above 2016-17 levels.

The fact remains that the more dependable fundamentals of consumer spending are weakening right as we enter the critical part of the year.

I also posted about the U. of Michigan Consumer Sentiment Survey for August:

The University of Michigan on Friday said its final index of August consumer sentiment was 89.8, a drop of 8.6 points from July. That was the largest monthly drop since December 2012, when consumers were worried about the “fiscal cliff” of rising taxes and reduced federal government spending. (…) About a third of consumers surveyed mentioned tariffs as a negative driver, said Richard Curtin, the survey’s chief economist. (…) Respondents who mentioned tariffs expected stronger inflation in the year ahead than those who didn’t, Mr. Curtin said. They also were more likely to say they expected rising unemployment and smaller income gains. (…)

The Conference Board has its own survey and @LizAnnSonders tweeted this interesting chart that raises doubt about consumers eventually seriously dipping into their savings:

The ECRI Recession Indicator Signaling Recession

ECRI’s popular recession indicator just fired a warning as reflected in the following chart.

There are several things to note in looking at the chart:

• First, it has historically done an excellent job at signaling oncoming recessions.  Red down arrows.  There were several other signals so the process is not perfect but historically very good.
• Ned Davis Research plots the ECRI index and compares the index to a 98-week smoothed moving average line. Think of the darker red line in the chart as the trend in U.S. economic activity as measured by the ECRI Weekly Leading Index. A signal is generated when the 98-week long-term smoothed trend line rises or falls by 0.1%.  The contraction signals are in red. If you look closely at the dotted red 98-week moving average line, you can see when it turns higher and lower. Note the trend higher post recessions (“Expansion” signals).
• Prior to 2009, there were few false signals. This process has had a tougher time (a number of false signals as indicated by the small yellow circles) since the Great Financial Crisis. I attribute them to the unprecedented determination of global central bankers to stimulate economies and become indiscriminate buyers of bonds and equities (the Japanese Central Bank, the European Central Bank and the Swiss Central Bank). Recall Mario Draghi’s promise, “Whatever it takes…”.  But one must question the sanity of $17 trillion in negative yielding sovereign debt.  Everything cycles; therefore, I would look at the data. I just don’t believe that 17 Fed members (10 voting members) and their global central bank friends have the ability to prevent recessions.
• Bottom line: ECRI’s model has just flashed a recession signal. Heed the warning.

• Sam Zell: It’s difficult to have a recession when interest rates are zero

• Chicago billionaire Sam Zell is raising cash to record levels in this dicey climate

Companies Embrace Cheap Debt

Apple Inc. AAPL 1.70% on Wednesday joined U.S. companies including Deere DE 0.60% & Co. and Walt Disney Co. in a recent sprint to issue new bonds, taking advantage of the steep decline in benchmark interest rates and a surge in investor demand.

Apple launched its first bond deal since 2017, selling $7 billion of debt. All three companies issued 30-year bonds with yields below 3%, a first for the corporate debt market.

Twenty-one companies with investment-grade credit ratings issued bonds totaling about $27 billion on Tuesday, said Andrew Karp, head of investment-grade capital markets at Bank of America Corp. “That’s equivalent to a busy week for us—in one day,” he said. About 20 more companies were expected to issue investment-grade bonds Wednesday. (…)

The United States now has the only interest rate in the developed world that’s north of 2%  @biancoresearch @charliebilello

Six reasons why it can make sense to buy a bond with a negative yield

Hedged yields matter

For global fixed income investors, the opportunity set includes various different regions. Normally, investments in foreign currency securities are hedged[ii] to remove the risk of currency fluctuations. The additional cost (or return) from currency hedging can change the attractiveness of bonds, often quite dramatically.

For example, the 10-year German Bund yield at -0.6% appears unattractive for US dollar investors. However, currency hedging rates are based on the difference between US and German short term interest rates and, since US short term interest rates are much higher than in Germany, US investors are effectively paid money to hedge euro exposure. On a currency hedged basis, US investors can earn a yield of 2.2% when investing in German 10 year bonds. This is higher than the 1.6% available on US 10 year Treasuries.

Even though the Fed is expected to cut interest rates, as long as the differential between the US and the euro area remains elevated, German bunds will remain attractive to US investors. The same goes for other key investors of developed market bonds. Currency hedging can transform negative yields into positive yields. 

Income vs capital gain

Leaving aside currency hedging, investors in negative yielding bonds are guaranteed to lose money if they hold them to maturity. However, many investors do not intend to do this. An investor who has a view that yields are likely to fall further could buy negative yielding bonds in the expectation that they will benefit from capital gains, if their view turns out correct. They could then sell them and crystallise that gain.

For example, the Swiss 10-year bond was yielding -0.1% at the beginning of the year. Despite this, as of 22 August, it had returned 5.6% so far this year. Negative yields are not an impediment to positive returns. Of course, this works both ways. Any rise in yields could lead to significant losses.

Portfolio diversification benefit

In a broader asset allocation context, bonds still play a vital role, even at negative yields. (…) bonds have tended to perform well when equities have been struggling and vice-versa. The risk-reduction aspect is especially important in the times of distress. In “flight-to-safety” episodes, government bonds are usually the primary beneficiaries of capital leaving stocks.

This means that even if negative-yielding bonds detract from return under normal conditions, they can still considerably reduce the risk of a portfolio.

Liability matching with negative yields

Liability-relative investors, such as insurance companies and pension funds, are not always concerned about the absolute level of yields or return prospects from bonds. They often buy bonds as a “match” for their liabilities. The present value of these liabilities is calculated in a variety of ways but often is strongly influenced by government bond yields. For example, in the euro area, the rates used by the insurance industry are negative up to the 11 year maturity point[iii]. Therefore, these liability-driven market participants can buy negative-yielding German Bunds to match a liability in the future. Their values will move in tandem with each other.  The alternative of not buying negative matching assets would leave them exposed to significant risks if interest rates were to fall further.

Bonds as deflation hedge

Most asset classes struggle in a period of deflation (when prices fall). Fixed interest government bonds are an exception. Due to their fixed coupon and principle payments, they retain their value and will deliver a positive real (inflation-adjusted) return if inflation falls below their yield. In other words, a negative yielding bond can deliver a positive real return if there is deflation. Negative-yielding bonds can therefore act as a hedge against deflation. Although deflation is not a reality in Europe at the moment, inflation has remained stubbornly low in recent years, despite the best efforts of central banks. As a result many investors are concerned that we could suffer deflation in future – Japan has been grappling with it for more than two decades. Fixed interest bonds, whether positive or negative yielding, would be one of the few asset classes that would be expected to perform well if this comes to pass.

What is the alternative?

Finally, even if investors are not happy about paying to lend money, what is the alternative to owning bonds? Banks have historically not passed on negative deposit rates to retail investors, partly because of concerns it could result in a run on the bank. However, there are signs that this is changing – UBS recently announced that it will start charging negative interest rates on euro deposits over €1 million. Retail deposits may no longer offer a shelter.

Furthermore, deposit insurance schemes only protect bank deposits up to a value of €100,000, so are not suitable for large institutional investors.

Physical cash would be another option. However, there is a cost associated with storing and handling cash. For larger investors they would need to hire a vault, with associated costs and security needs. For many investors this is too impractical to be a realistic option. However, there could come a point, if bond yields falls sufficiently low, that cash becomes a viable alternative.

Investors may shift further along the risk spectrum, into corporate bonds, but even here negative yields are a growing presence. High yield bonds offer higher (positive) yields but with much higher risk than government bonds. Gold has historically served as a good store of value but has additional risk that investors need to be aware of.

All told, unless investors want to take on additional risk, bonds, even at negative yields are likely to continue to remain in demand.

Negative rates are the original creation of the ECB:

• EU Bank Bosses Warn Of “Grave Consequences” If ECB Keeps Cutting Rates

The ECB’s imposition of negative interest rates have created an “absurd situation” in which banks don’t want to hold deposits, rages UBS CEO Sergio Ermotti, arguing that this policy is hurting social systems and savings rates. (…)

Bank of Canada Balks at Joining the Global Rate-Cutting Trend

At a decision Wednesday, policy makers left interest rates unchanged for a seventh straight meeting and surprised markets by asserting current levels of stimulus are still appropriate despite the escalating trade war between China and the U.S.. (…)

“In sum, Canada’s economy is operating close to potential and inflation is on target. However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies,” the central bank said in its statement. “In this context, the current degree of monetary policy stimulus remains appropriate.” (…)

TECHNICALS WATCH

The 13/34–Week EMA Trend is hanging in: (chart courtesy of CMG Wealth)

“WeTried”

WeWork’s Adam Neumann returns controversial $5.9m payment

The FT reports that WeWork’s chief executive, Adam Neumann, has returned a $5.9m payment his investment vehicle received from the company for the rights to use the trademarked word “we” after analysts and would-be investors objected.

Fraudsters Used AI to Mimic CEO’s Voice in Unusual Cybercrime Case Scams using artificial intelligence are a new challenge for companies

Thank god we can now tweet!