U.S., China Make Progress, but Major Hurdles Remain The sides remain divided on issues such as a reduction of Chinese subsidies to domestic firms and protection of intellectual property
The U.S. and China wrapped up their first face-to-face trade negotiations since a temporary tariff truce was declared last month, making progress toward an agreement but leaving the thorniest issues to be resolved in higher-level talks, according to people with knowledge of the discussions.
During three days of talks between midlevel trade officials from Washington and Beijing in the Chinese capital that ended Wednesday, the two sides made progress on issues such as additional Chinese purchases of U.S. goods and services, as well as opening China’s markets further to American capital, the people said. But they cautioned that the two teams hadn’t yet made a breakthrough and more discussions are needed to resolve a trade fight that has unnerved global markets. (…)
In a brief statement issued Thursday morning, China’s Commerce Ministry said the three-day negotiations “promoted mutual understanding and laid the foundation for solving problems of mutual interest.” It also said both sides had agreed to keep close contact.
Still, the narrowing of the two sides’ differences on trade, the people said, is paving the way for a next round of talks among cabinet-level officials, potentially involving U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He, the top economic aide to President Xi Jinping. (…)
In a sign of progress made on that front, Beijing announced on Tuesday—during the ongoing talks—that it had approved imports of five new varieties of genetically modified crops, a move sought for years by U.S. farmers and agribusinesses.
During the talks, the two sides went over a number of more challenging trade demands from the Trump administration, including those requiring Beijing to keep Chinese firms and officials from pressuring U.S. companies into transferring technology against their will, the people said. The U.S. side also asked China to reduce subsidies to Chinese companies in a bid to create a fairer competitive environment for foreign firms.
The two sides remained apart on many of those issues, the people said, especially on those involving subsides to Chinese state-owned enterprises. The Chinese leadership sees giant state companies as the foundation of the Communist Party’s rule and over the past few years has sought to make the vast state sector even bigger. (…)
China and the United States made progress during their recent trade talks over structural issues such as forced technology transfers and intellectual property rights, China’s commerce ministry said on Thursday.
China Car Sales Collapse: First Annual Drop In Over 20 Years
DATA DEPENDENT, MARKET SENSITIVE
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Fed Is Unlikely to Raise Rates in Next Months, Minutes Show Recent market volatility and signs of slowing global growth made ‘extent and timing of further policy firming less clear’
The minutes revealed that Fed officials thought concerns over slowing global growth and trade tensions that roiled markets in the run-up to the meeting made “the extent and timing of further policy firming less clear than earlier.” (…)
In December, “many participants expressed the view that, especially in an environment of muted inflation pressures, the committee could afford to be patient about further policy firming,” the minutes said. (…)
Fed’s Evans: Fed Has Time to Take Stock Before Next Rate Hike
The Federal Reserve Bank of Chicago president said the first half of this year very important to determine the course of monetary policy
“Because inflation is not showing any meaningful sign of heading above 2% in a way that would be inconsistent with our symmetric inflation objective, I feel we have good capacity to wait and carefully take stock of the incoming data and other developments” before changing the current setting of monetary policy, Mr. Evans said in a speech in Riverwoods, Ill.
“If they warrant meaningful adjustments to my modal outlook or the balance of risks to the economy, then I would change my views of the appropriate path of policy accordingly,” Mr. Evans said, adding the first half of this year “will be very important” to determine the course of monetary policy. (…)
“Recent financial market developments and uncertainties regarding growth abroad, trade policy, and possible fiscal headwinds have cumulated to increase the downside risks,” Mr. Evans said. (…)
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Rosengren Says Fed Can Wait for Clarity Before Next Rate Move Boston Fed leader says current monetary policy seems appropriate for now
“With two very different scenarios—economic slowdown implied by financial markets; or growth somewhat above potential GDP growth, consistent with economic forecasts—I believe we can wait for greater clarity before adjusting policy,” Mr. Rosengren said in the text of a speech prepared for delivery before an event in Boston. “Current monetary policy seems appropriate for now, and can patiently observe future economic developments.”
Mr. Rosengren, who has been one of the central bank’s most steadfast supporters of rate rises, will hold a voting role on the interest-rate setting Federal Open Market Committee this year. (…)
“I personally suspect that financial market sentiment may have become unduly pessimistic,” Mr. Rosengren said. (…)
(…) “A patient approach to monetary policy adjustments in the coming year is fully warranted in light of the uncertainties about the state of the economy and about what level of policy rates is consistent with a neutral stance,” Mr. Bostic said in the text of a speech to be delivered before a local group in Chattanooga, Tenn. (…)
While his speech didn’t say specifically the number of rate increases he favors for the year, Mr. Bostic indicated he doesn’t see the Fed needing to do much more.
“Should conditions play out along my baseline outlook, I see little need to engage in restrictive monetary policy and push the federal funds rate above a neutral stance,” Mr. Bostic said. “All the available evidence at the moment points to caution regarding firms’ approach to expansion.” (…)
“Should tariff rates increase from here or encompass a broader set of goods, my contacts have said this would likely create significant challenges,” Mr. Bostic said. “Many appear to have reached their limit on cost-absorbing measures, making a possible next round of tariffs a more direct hit to the consumer,” he said.
Or to profit margins.
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Bank of Canada puts higher interest rate on hold in wake of Canada’s slowing economy
“The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy,” the bank said in a statement. (…) The bank’s new qualified commitment to raise rates “over time” is meant to “inject ambiguity” into what it will do in the months ahead, Bank of Canada Governor Stephen Poloz explained to reporters. He said the bank is hoping to have a clearer picture of how the economy is evolving by the time it releases its next forecast in April. “It’s all about the data,” Mr. Poloz said. (…)
Gluskin Scheff chief economist and strategist David Rosenberg said the bank has shifted from being “hawkish” on wanting higher rates to “dovish” in the span of a few short months. “The next move may very well be a rate cut,” he said.
The bank also released its first quarterly forecast of 2019, highlighted by a sharp downgrade in GDP growth. The Bank of Canada says the economy will grow just 1.7 per cent this year, down sharply from its previous forecast of 2.1 per cent, and below the estimated 2-per-cent pace of 2018.
The central bank pointed out that the U.S.-China tariff fight is “weighing on” the global economy, depressing the prices for many of the commodities that dominate Canadian exports. (…)
EARNINGS WATCH
IBES/Refinitiv reports that 20 companies have reported their Q4 results. Beat rate is 90% and the surprise factor +3.1%. The start of this earnings season looks similar to Q3’18. On Oct. 11, 88% of the 24 companies that had reported beat expectations by 3.2%.
Trailing EPS are $162.27, above the estimate for the full year 2018 of $161.76.
A Junk-Bond Drought Is Making Investors Nervous No U.S. company rated below investment grade has issued bonds since November, the longest stretch without a high-yield sale in more than two decades.
(…) December was the first month since 2008 without a junk-bond sale, according to Dealogic. Thursday is on pace to mark 41 days without a deal, the longest stretch in data going back to 1995. Volatility in financial markets, uncertainty about the economy and the recent drop in oil prices are discouraging riskier companies from issuing debt and investors from buying it, analysts say.
Slack investor demand recently lifted the premium, or spread, that companies with junk credit ratings have to pay over risk-free government debt to the highest level in more than two years. The corresponding tumble in high-yield bond prices last quarter erased investors’ gains in what had been one of the few bright spots in the bond market in the first nine months of last year.
Junk-rated companies haven’t been completely absent from the debt markets. Issuance of so-called leveraged loans totaled $25 billion in November and December, according to LCD, a unit of S&P Global Market Intelligence. But that was still a significant slowdown from previous months. (…)
The junk-bond market has been hit by a $101 billion net outflow of investor cash last year, even as high-yield bonds outperformed higher-quality debt for much of 2018, according to fund-tracker EPFR. (…)
(…) Gundlach, who oversees more than $121 billion of assets under management, said on an investor webcast that the signal “may be … a false positive,” but “this is something we’re going to have to watch very, very carefully.”
Gundlach said the current buy-the-dip mentality reminds him of the complacency that took place in the 2007-2008 credit market right before the great financial crisis.
“There’s potential for that here. Because the panic in December was a buying panic – not a selling panic – you never saw the VIX truly spike the way you want for a panic. You want to see that thing over 40. It never made it to 40.”
The CBOE volatility index, which is known as the VIX and which is often seen as an investor fear gauge, stands around 20.50 points.
Gundlach said Federal Reserve Chairman Jerome Powell on Friday pivoted from pragmatism to a “Powell Put” – that the Fed under his leadership will act like an options contract to prevent stocks from falling too much. (…)
Gundlach said the ballooning U.S. federal government debt is “a completely horrific situation” and that the United States could be at a “tipping point” in a “debt-compounding cycle.”
“Are we growing at all or is it all just the increase in debt?” Gundlach asked.
Gundlach on Dec. 11 said that the next move in the dollar was lower and that the S&P 500 index would fall below its February 2018 lows. Both predictions turned out to be accurate.
Speaking of junk, small junk:
About 60% of small cap debt is junk-rated versus less than 10% for the S&P 500; 40% of small cap debt is floating and more sensitive to higher short-term rates. Moreover, 36% of the Russell 2000, a benchmark for small cap stocks, did not produce earnings over the past 12 months, and profit trends are deteriorating relative to large caps. (Sun Trust)
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FYI: “In a sign of elevated near-term stress, the front-month VIX futures are trading higher than the second-month contract; in fact, the whole curve through the sixth contract is inverted, an unusual phenomenon since the market outlook generally becomes less certain in the more distant future.”
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