China Moves to Address U.S. Economic Concerns Beijing agrees to reduce auto tariffs and buy more American products, but key differences remain
Beijing sought to ease tensions with Washington as its top trade negotiator told U.S. officials that China was planning to reduce auto tariffs and boost purchases of soybeans and other crops, according to people in both capitals briefed on the discussions. (…)
Washington is also readying a host of additional measures to take against China. Federal prosecutors are expected to unseal criminal charges shortly against hackers linked to the Chinese government, The Wall Street Journal reported last week. The hackers allegedly engaged in a sophisticated multiyear scheme to break into U.S. technology service providers to compromise the networks of their clients.
The U.S. is also preparing to use export controls, indictments and other tools to counter the theft of intellectual property. (…)
Officials in both Beijing and Washington insisted the Huawei controversy wouldn’t derail talks. (…) On Tuesday, President Trump told Reuters in an interview he would intervene with the Justice Department on the Huawei matter if it helped secure a trade deal, connecting two issues that his aides had earlier said were separate. (…)
On Tuesday morning, Mr. Trump wrote on Twitter that “very productive conversations” were taking place with China. “Watch for some important announcements!” (…)
Beijing is also considering other changes to try to settle the trade dispute, including making changes to the Made in China 2025 plan, said people familiar with the matter. The a state-led industrial policy—aimed at enabling Chinese companies to dominate industries from artificial intelligence to robotics—is a focal point of U.S. complaints that Beijing engages in unfair trade practices that put foreign firms at a disadvantage to Chinese companies. (…)
Clearly, both Xi and Trump want a deal. Now, add these next 3 items:
The research group’s measure of expected default frequency has risen above early-warning levels for about 25 percent of corporate borrowers. (…)
“If the Chinese economy were to slow further or, worse still, if the economy were to enter a sustained downturn, we would likely see corporate credit risk start to increase sharply,” he said. (…)
“All of these industries are construction-related and the rise in credit risk mirrors the fall in construction activity over the past several years,” the report said. (…)
Watch China housing!
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US farmers hit by soaring storage costs Trade war double whammy as soyabeans go unsold and tariffs push up cost of metal bins
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Apple Is Considering Moving iPhone Output If Tariffs Hit 25% Apple has long used China as its production base for everything from its signature device to iPads and Macs.
(…) A 10-percent tariff could result in an earnings-per-share decline of just $1 for Apple, should all its hardware sold in the U.S. be subject to the levy and the company absorbs the cost, RBC analyst Amit Daryanani wrote in a Nov. 28 research note. That compares with the average 2019 Apple-EPS estimateof $13.32, according to data compiled by Bloomberg.
However, a more severe scenario of a 25 percent tariff — absorbed by Apple — could result in an EPS decline of about $2.50, he added. (…)
U.S. Producer Prices Edge Higher
The headline Final Demand Producer Price Index using new methodology ticked 0.1% higher (2.5 % y/y) during November following a 0.6% October increase. No change in the index had been expected in the Action Economics Forecast Survey. Producer prices excluding food & energy rose 0.3% (2.7% y/y) after a 0.5% jump. A 0.2% gain had been anticipated. The PPI excluding food, beverages and trade services is another measure of underlying price inflation. It also rose 0.3% (2.8% y/y) last month following a 0.2% increase.
The PPI using the old methodology fell 0.8% during November (+1.6% y/y) following a 0.8% October decline. Prices excluding food & energy improved 0.3% (2.4% y/y) after holding steady in October.
The moderate gain in producer prices overall reflected a 0.3% increase (2.6% y/y) in services prices. It followed a 0.7% rise. (…) Goods prices decreased 0.4% (+2.2% y/y) last month after a 0.6% October rise. Goods prices excluding food & energy eased 0.3% (+2.5% y/y) following no change. Durable consumer goods prices held steady (1.7% y/y) after a 0.2% decline. (…)
Food prices strengthened 1.3% last month (0.4% y/y) after a 1.0% increase. (…) Construction prices improved 0.2% (5.1% y/y) after a 1.9% strengthening.
Prices for intermediate demand processed goods declined 0.7% (+4.3% y/y) and offset a 0.8% rise during October.
SENTIMENT WATCH
The Great Cheapening: Global Stock Valuations Now at Five-Year Lows
The forward price to earnings ratio for global stocks is at five-year lows, having dropped to about 13.3 times. That’s down from more than 16 times in early 2018, according to FactSet’s World stock index, which includes tens of thousands of listed securities around the world. (…)
Earnings-per-share of stocks listed on FactSet’s World Index are expected to rise about 15.9% in the next 12 months.
That’s down from the highs of above 25% earlier this year, but well above the 5.8% average seen in the past five years. (…)
Understand that the above discusses forward P/Es. David Rosenberg and many CFOs would be wary of those today:
RECESSION MATH
The excellent David Rosenberg is bearish and his current narrative fits his views. His GDP math is pretty simple:
- lagged impact of Fed’s QT: –1.0%
- fiscal stimulus withdrawal: –1.0%
- negative wealth effect (equities, homes): –1.0%
- corporate deleveraging: –0.5%
“The damage has been done,” leaving 2019 with a modest 0.5% contraction like in 1954, 1958, 1974 and 1980. A spreading trade war: another –0.5%.
Many U.S. Financial Officers Think a Recession Will Hit Next Year Almost half of U.S. chief financial officers believe a recession will strike the U.S. economy by the end of 2019, with the tight labor market and growing trade tensions driving economic jitters among corporate America.
(…) Additionally, more than 80% of U.S. CFOs think a recession will strike by the end of 2020, according to the Duke University/CFO Global Business Outlook survey released Wednesday.
“All of the ingredients are in place: a waning expansion that began in June 2009—almost a decade ago—heightened market volatility, the impact of growth-reducing protectionism, and the ominous flattening of the yield curve which has predicted recessions accurately over the past 50 years,” said Campbell Harvey, a director of the survey. (…)
The CFOs also were concerned about recent international trade disputes. The Trump administration’s growing trade frictions with foreign countries, particularly China, have led many firms to put investments and other business moves on hold until tensions clear up.
On top of that, CFOs from around the world are pessimistic, too. Almost all executives surveyed in Africa think their countries will be in recession by the end of next year, as do 86% of CFOs in Canada. Sixty-seven percent of executives thought the same in Europe.
“The U.S. outlook has declined, and moreover the outlook is even worse in many other parts of the world, which will lead to softer demand for U.S. goods,” said John Graham, another director of the survey. (…)
If you missed yesterday’s Daily Edge:
Charles Schwab’s Jeffrey Kleintop finds that an inversion of the 10y-3m U.S. yield curve has preceded each global recessions by about one year since 1970 and should be used as a signal for non-U.S. stock markets:
(…) Why is the U.S. yield curve so much better at gauging global economic conditions? For one thing, the U.S. is the world’s largest economy and a major source of demand for global companies. In addition, the U.S. government bond market is the largest and most liquid in the world, which may mean it better reflects global conditions and is less susceptible to domestic influences than other countries’ bond markets. (…)
Word-ex-U.S. equities are now officially in a bear market, down 20.1%:
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The S&P 500 is off 10.1% from its Sep. 20 peak:
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But U.S. small caps are down 18.1% S&P 600) or 17.3% (Russell 2000):
Notice the unsupportive 200-day moving averages.
Trump, Top Democrats Clash Over Spending Bill President Trump sparred in public with top Democrats, declaring he would shut down the U.S. government if Congress refused to fund his proposed border wall.
Huawei’s Meng Wanzhou Granted Bail by Canadian Judge Huawei’s finance chief must reside at Vancouver homes and adhere to a curfew while awaiting a decision on her extradition to the U.S.
Canadian and U.S. officials said they were concerned about the detention of a former Canadian diplomat in China, as Ottawa found itself at the center of an increasingly tense diplomatic standoff over the arrest in Vancouver of a senior executive at Huawei Technologies Co.
Michael Kovrig, a senior adviser with Brussels-based nonprofit International Crisis Group, was detained in Beijing on Monday evening by state-security officials, the group said in a statement. He recently traveled to China to work on a research report on North Korea, a person familiar with the matter said Tuesday.
It wasn’t clear whether Mr. Kovrig’s detention was related to that work. His mobile phones were switched off, and China’s foreign ministry didn’t respond to questions about his situation. (…)