CONSUMER PRICE INDEX – AUGUST 2018

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in August on a seasonally adjusted basis, the same increase as in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.7 percent before seasonal adjustment.

Increases in the indexes for shelter and energy were the main contributors to the seasonally adjusted monthly increase in the all items index. The energy index increased 1.9 percent in August; a 3.0-percent increase in the gasoline index was the largest factor, but the other energy component indexes also rose. The shelter index increased 0.3 percent in August, the same increase as in July. The food index rose only slightly in August, with the index for food at home unchanged.

The index for all items less food and energy rose 0.1 percent in August, the smallest monthly increase since April. (…)

The all items index rose 2.7 percent for the 12 months ending August, a smaller increase than the 2.9 percent increase for the 12 months ending July. The index for all items less food and energy rose 2.2 percent for the 12 months ending August and the energy index increased 10.2 percent; these were both smaller increases than for the 12 months ending July. The food index increased 1.4 percent over the last 12 months, the same increase as for the period ending July.

Business Prices Declined in August Producer-price index posts first monthly drop since February 2017; recent summer price deceleration could be temporary

The producer-price index, a measure of the prices businesses receive for their goods and services, declined a seasonally adjusted 0.1% in August from a month earlier, the Labor Department said Wednesday. (…)

The recent downtrend appears to be driven, in part, by a volatile gauge of margins called trade services. When excluding this measure, along with food and energy, two other volatile categories, prices rose in August. (…)

Overall, core PPI is still rising at 2.8-3.0% annualized. Core Goods prices are up in the 2.5% range. Declining PPI in Trade Services reflect declining retail margins this summer. Note that import tariffs are not accounted for by PPI. (Table from Haver Analytics)

The recent collapse in industrial commodity prices will help contain goods inflation (next 2 charts from John Aitkens, TD Securities)

Global industrial production growth seems to have peaked out:

IP growth rates have declined in China, Japan and Europe:

But IP is holding up in the U.S., although the recent YoY growth rates are against a very weak base last year. Last 3 months annualized: +1.0% following +5.6% annualized between January and April 2018.

Economy Grows Moderately, But Trade Fears Rise, Fed’s Beige Book Says Businesses are concerned about rising input costs, but otherwise largely optimistic about the economy

Wednesday’s report showed that while businesses at large remained optimistic about the economic outlook, many expressed uncertainty over rising trade tensions. In some cases, climbing trade worries resulted in instances of postponing business investment.

Many firms said they cannot pass on the price increases in materials that stem from tariffs. (…) For companies in the New York Fed District, recently enacted tariffs have translated into higher input costs in the manufacturing and distribution sectors. Companies in this area expressed concern over the impact of trade policies on their businesses. (…)

More broadly, businesses reported that consumer confidence was high and in certain cases helping drive demand. (…) Half of the districts cited instances in which labor shortages constrained sales or delayed projects.

Wage increases were described as modest or moderate.

Meanwhile, prices across Fed districts rose at a modest to moderate pace on average. (…)

Nearly One-Third of U.S. Firms in China Mull Investment Delays

A new survey of U.S. companies doing business in China found that 31.1% are considering delaying or canceling investment decisions over uncertainties created by tariffs and U.S.-China trade friction.

In addition, 50.8% of the companies surveyed said they anticipate a loss of profits because of the tariffs, while 47.1% said they are bracing for higher manufacturing costs. (…)

The poll released Thursday also showed that should the U.S. levy tariffs on $200 billion more in Chinese goods, 74.3% of respondents would be negatively hit, while additional Chinese levies against $60 billion worth of U.S. products would negatively affect 67.6% of respondents.

Tariffs and trade tensions are prompting 6% of respondents to consider relocating manufacturing facilities back to the U.S., while 64.6% said they haven’t and don’t plan to relocate.

The poll also found that 30.9% of respondents are adjusting their supply chains to outside of the U.S., while 30.2% are making similar adjustments to outside of China.

In a separate survey by the European Chamber of Commerce in China, also released Thursday, 17% of respondents said they were delaying further investment into China or expansion. (…)

Canada, U.S. deadlocked as Mexico rejoins NAFTA talks

Talks between Ottawa and Washington remain deadlocked over U.S. access to the heavily protected Canadian dairy market and the future of the binding Chapter 19 dispute-settlement mechanism, even as Mexico returns to the American capital to hammer out the text of a proposed bilateral deal that Donald Trump says could proceed without Canada. (…)

Trade players say they are being told that not much was achieved during the single day of talks this week between Ms. Freeland and Mr. Lighthizer.

“I heard it didn’t go very well. The U.S. isn’t moving much,” said Dan Ujczo, an Ohio-based international trade lawyer who has worked for the Canadian and U.S. governments and monitors the NAFTA talks closely.

A source close to the talks said discussions remain stymied over dairy access and Chapter 19 and that, as of Wednesday afternoon, there was no sign of a breakthrough. The source said that a deal did not seem possible this week even if Ms. Freeland returned to Washington in the next few days. (…)

Some in Congress, including Democratic Senator Patrick Leahy, have rejected Mr. Trump’s plan, saying the proposed deal would not pass the Senate unless it included Canada, which he described as the United States’ “greatest trading partner.” (…)

• Who Has Leverage at the Nafta Table? It Might Not Just Be Trump

BTW:

U.S. Proposes New Trade Talks With China to Avert Tariffs The Trump administration is giving Beijing another chance to try to stave off new tariffs on $200 billion in Chinese exports, asking top officials for a fresh round of trade talks later this month.

The invitation from Treasury Secretary Steven Mnuchin comes as some Trump officials said they sense a new vulnerability—and possibly more flexibility—among Chinese officials pressured by U.S. tariffs imposed earlier this year and threats for more.

It also follows a steady rise in political pressure on President Trump to ease up on trade fights—which have pinched consumers and prompted painful retaliation against U.S. exports—ahead of November elections in which his Republican Party risks losing congressional control. (…)

Chinese officials said they have grown wary of the Trump administration’s unpredictable decision-making process and may be hesitant to accept without a clear sign U.S. negotiators have authority to speak for the president. (…)

People who have followed the Trump administration’s China trade strategy closely cautioned against casting the invitation as a major breakthrough, saying the administration remained divided internally on its China strategy. They said talks would be unlikely to derail a planned round of tariffs on $200 billion in Chinese goods. That followed U.S. tariffs imposed on $50 billion earlier this year. (…)

The hawkish camp, led by U.S. Trade Representative Robert Lighthizer and trade adviser Peter Navarro, argues that additional tariffs should be imposed to increase American leverage. Asking for talks—the second time the U.S. has done so recently—puts the U.S. in a weaker bargaining position, they believe.

Mr. Mnuchin and his ally, Mr. Kudlow, make the opposite case. They are trying to ease trade frictions. They say Beijing may offer concessions now, especially as the trade team rushes to strike new pacts with partners from the European Union to Canada and Mexico. (…)

At least one-fifth of the more than 100 U.S. demands, laid out in a U.S. proposal to the Chinese side in May, aren’t open to negotiation, Chinese officials have indicated. (…)

Imports into California Ports Tumbled in August The 3.1% decline suggests an early-summer shipping surge was triggered by concerns over tariffs, and importers now are pulling back foreign purchases

(…) The second straight monthly decline followed a sharp 8.4% increase in June that appeared to be fueled by companies pulling forward shipments as the trade tensions between the U.S. and China flared and both countries threatened new tariffs on hundreds of billions of dollars’ worth of trade. July and August are usually among the highest-volume months for imports, as retailers prepare for the busy fall and holiday shopping seasons. (…)

Still, goods appear to be flowing into other ports around the U.S. The monthly Global Port Tracker, published by the National Retail Federation and Hackett Associates, estimates that imports into the nation’s major seaports reached a record 1.92 million TEUs in August, up 4.8% from the same month in 2017. (…)

UNINTENDED CONSEQUENCES?

• Japan and China Find Common Ground in Trump’s Tariffs as Leaders Meet Xi Jinping and Shinzo Abe say relations are warming

The leaders of China and Japan met Wednesday for the first time since last year and said relations were warming, a development Tokyo officials attribute to the pressure both feel from President Trump. (…)

Mr. Abe said he would visit China next month and reiterated that he hoped Mr. Xi would reciprocate with a visit to Japan, which would be the Chinese leader’s first since taking his position. (…)

Many of the made-in-China goods targeted by the U.S. contain Japanese parts, and some are made at factories owned by Japanese companies. In addition, Japan itself has been hitby U.S. tariffs on steel and aluminum, and Mr. Trump has threatened further action against Japanese cars and car parts. (…)

• Putin and Xi Jinping Affirm Both “Oppose Unilateralism And Trade Protectionism” In Summit

Presidents Vladimir Putin and Xi Jinping met on the sidelines of the Eastern Economic Forum in Vladivostok on the Sino-Russian border Tuesday. Simultaneously Russia and China kicked off unprecedented joint military exercises as part of Russia’s annual Vostok war games, which will run for a week and includes thousands of Chinese People’s Liberation Army troops, and some 300,000 Russian personnel. 

President Putin has of late sought closer relations with China, which Russia shares a massive 4,200km border with, amidst both countries experiencing deep tensions with the West, including US sanctions against Moscow and a growing trade war between China and Washington.

It’s the third time this year the two leaders have met and the fact that it was planned at the inauguration of Vostok 2018 no doubt sent a strong signal to Washington that the two countries’ usually chilly relations are warming fast in the face of a common increased threat from the West.  (…)

“Both Beijing and Moscow are looking to demonstrate that trade wars and sanctions will only push them to develop new alliances,” comments senior analyst Florence Cahill for a risk consultancy group as cited in FT. And explained further, “As long as their prevailing worldview is shaped by an animus towards a US-led international order, co-operation on all levels between Moscow and Beijing will likely be more pronounced than competition between them.”

China’s defense ministry put out a statement Tuesday saying that the country’s participation in Vostok 2018 would enhance the counter-attacking capabilities of its armed forces and reinforce ties with Russia.

The remarks, no doubt, were intended directly for the Trump administration.

Global Oil Supply Hits Record High as OPEC Ramps Up Production OPEC oil production surged last month, more than making up for a decline in Iranian supply due to U.S. economic sanctions, the International Energy Agency said.

In its closely watched monthly oil market report, the IEA said crude oil output in the Organization of the Petroleum Exporting Countries climbed in August by 420,000 barrels a day, to average 32.63 million barrels a day.

That was the cartel’s biggest month-on-month increase in more than two years, bringing the supply from the group’s 15 producers to a nine-month high. The increase mainly came from higher production in Libya, Iraq, Nigeria and Saudi Arabia—the de-facto head of OPEC.

The jump in production “far outweighed losses from Iran ahead of U.S. sanctions,” the agency said, in a sign that Saudi Arabia—the world’s largest exporter of crude—and its production allies are moving rapidly to fill global supply outages and keep the market in balance.

The spike in OPEC output brought total global supply to a record 100 million barrels a day in August, according to the IEA, a Paris-based organization that advises governments and corporations on energy trends.

OPEC, in its own monthly oil market report on Wednesday, said its production had risen by 278,000 barrels a day last month.

Iranian crude production fell month-on-month by 150,000 barrels a day in August, to 3.63 million barrels a day, while exports dropped by 280,000 barrels a day to stand at 1.9 million barrels a day, according to the IEA. “Top buyers China and India cut back sharply,” the agency’s report noted. (…)

The IEA said Saudi crude production rose by 70,000 barrels a day in August, to 10.42 million barrels a day. Russian output was steady at just over 11.2 million barrels a day last month, a 300,000 barrels a day increase on a year ago.

Russian production was “on par with that of October 2016, meaning Russians producers have unwound all by 20,000 barrels a day of the cuts in place” under the OPEC-led agreement, the report added.

The IEA on Wednesday left oil demand growth forecasts for this year and next unchanged, at 1.4 million barrels a day for 2018 and 1.5 million barrels a day for 2019.

• The United States is now the largest global crude oil producer

Interestingly, yesterday the Department of Energy reported a 5.3 million barrel drawdown of U.S. crude oil inventories for the week, well above the Bloomberg consensus for a 2 million barrel decline. Almost Daily Grant’s says that

According to the Department of Energy, total U.S. crude inventories fell to less than 396 million barrels last week, down more than 15% year-over-year.  That’s despite a steady uptick in domestic output thanks in large part to the shale boom, as DOE production held near its all-time high last week at 10.9 million barrels a day, up 17% year-over-year.

In truth, however, the sharp decline was against bloated inventories last year and the U.S. is only back to its 5-year median while gasoline inventories are on the  high side. (Chart via The Daily Shot)

Also interesting, ADG also reports that

an anecdotal point from services giant Halliburton Co. indicates that shale activity may not be as bustling as some expected. Last Wednesday, Halliburton CEO Jeff Miller told attendees at a Barclays energy conference: “A decrease in customer urgency. . . has occurred, and we have more white space [in our calendar] than expected.”  Miller likewise observed that: “We are seeing slower than expected activity ramp on several new contracts in the Middle East.”  

Meanwhile:

• This level of storm activity in the tropics is unusual.

Source: @HellerWeather (via The Daily Shot)