THE ART OF THE DEAL
U.S., Europeans Agree to Iron Out Trade Differences President Trump declared a “new phase” in the relationship between the U.S. and the European Union, agreeing to hold off on proposed car tariffs and work with the EU to resolve their dispute over metals duties.
Speaking in a joint news conference in the Rose Garden on Wednesday, the two leaders agreed to begin discussions on eliminating the tariffs and subsidies that hamper trade across the Atlantic, and to resolve the steel and aluminum tariffs the Trump administration had imposed this year as well as the retaliatory tariffs the European Union imposed in response.
The package of measures announced by Messrs. Trump and Juncker would have the EU buying more liquefied natural gas and soybeans from the U.S., and the two sides would begin a “dialogue to reduce differences on regulatory standards between the two economies,” Mr. Trump said. The two sides also suggested they would hold off on further tariffs—a nod to Mr. Trump’s threats to apply tariffs on imported cars.
While the two sides said the deal was contingent on negotiating in good faith, there was no schedule set to complete the talks, meaning that what amounted to a temporary truce could turn into a permanent one—or fall apart if one side accuses the other of lagging behind. To complete a deal, the EU would also face the difficult task of forging a consensus among all its 28 members, including both France and Germany, who often have divergent trade priorities. (…)
The U.S. and the EU, as part of their agreement, agreed to try to use the World Trade Organization to deal with issues of intellectual-property theft, government pressure on companies to transfer technology to local partners, and excess capacity in many industries—the heart of the U.S. concerns about China. That would be a big change in tactics for the U.S., which has relied mainly on unilateral actions—including tariffs on $34 billion in Chinese goods—to get Beijing to change course.
Five years ago, then-President Barack Obama formally launched similar broad trade talks with the EU under Mr. Juncker’s predecessor. The talks made little progress, and the Obama administration subsequently focused on the Trans-Pacific Partnership with Asian countries. Mr. Trump blocked the pact immediately after taking office last year. (…)
Whether the deal with the EU goes further and will result in zero tariffs on autos and trucks is an open question. The joint statement put out by the EU and U.S. said that zero-tariff initiative involved “non-auto industrial goods.” (…)
But lowering auto tariffs to zero faces political hurdles both in the U.S., which has its own 25% tariff on imported light trucks, and in the EU, which imposes 10% tariffs on auto and light-truck imports. (…)
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Trump Shifts Trade Tactics With an Olive Branch Agreement with EU’s Jean-Claude Juncker suggests more a shift in strategy than an end to global hostilities
(…) the agreement that Mr. Trump announced alongside European Commission President Jean-Claude Juncker suggested more a shift in battle tactics than an end to global hostilities—a desire by Mr. Trump to line up allies in the fight to keep up the pressure on China. (…)
Still, Mr. Trump’s decision to stand down Wednesday is a significant moment. After months when Mr. Trump’s words and actions were largely oriented to taking an ever-harder trade line, oblivious to consequences and criticism, he showed a susceptibility to intense pressure from American business and Republican lawmakers and an openness to an alternative approach.
The president’s remarks with Mr. Juncker were striking, both for what he said and what he didn’t. A politician who has hammered regularly on the American trade deficit with Europe didn’t mention it at all, instead focusing on the $1 trillion in bilateral trade that flows in both directions.
Mr. Trump, who for decades has frustrated economists by portraying trade as a zero-sum game with only “winners” and “losers,” and by calling the EU “a foe,” instead hailed a new “phase of close friendship; of strong trade relations in which both of us will win.”
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The WSJ Editorial Board:
(…) The White House will crow that Europe blinked, but it’s more accurate to say the two sides are stepping back from mutually assured economic destruction. The car tariffs would certainly have punished Germany, the locomotive of Europe’s economy.
But Mr. Trump also had ample political and economic incentive to call a truce. The retaliatory tariffs from China, the EU, Mexico, Canada and Japan are beginning to hurt U.S. farmers and manufacturers. Mr. Trump felt obliged this week to bail out U.S. farmers by providing up to $12 billion to buy surplus crops that can’t find a foreign market. Harley-Davidson and other firms are moving plants abroad to avoid higher import costs and duck retaliatory tariffs. All of this in turn is beginning to have political consequences as more Republicans in Congress are finding their voice in favor of free markets.
The protectionist threat is far from over. The talks with Europe could founder on any number of issues, especially European barriers to competition from America’s more efficient service industries or genetically modified foods. France will be a particular problem. (…)
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No Contact to Restart Trade Talks With U.S., China Says
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What Does the Apparent Trump-EU Trade Truce Mean for China?
- a deliberate attempt to mend fences with allies as the U.S. girds for a protracted dispute with China. Or
- Trump’s apparent deal with Europe shows how bargains can be struck.
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China flexes muscles by scuppering $44bn chip deal Beijing’s failure to approve Qualcomm bid amid US trade tensions rattles global M&A
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Mexico and Canada Are Committed to a Trilateral Nafta Deal Trump last week hinted the U.S. could strike separate deals with the two countries
Maybe these trends are no coincidence with the search for truce without losing face:
Source: Capital Economics (via The Daily Shot)
U.S. New Home Sales Decline While Prices Plummet
Strength in the new housing market gave way to weakness last month. New single-family home sales declined 5.3% (+2.4% y/y) to 631,000 (SAAR) during June and more-than-reversed May’s 3.9% increase to 666,000, revised from 689,000. It was the lowest level of sales since October and was down from November’s high of 712,000. Expectations had been for 670,000 sales in the Action Economics Forecast Survey. Sales are calculated when contracts are closed and are tabulated by the National Association of Realtors.
The median price of a new home weakened 2.5% (-4.2% y/y) to $302,100 from $309,700, revised from $313,000. It was the lowest price since February of last year. The average price of a new home slipped 0.5% (-2.0% y/y) to $363,300, the lowest price since January 2017. (…)
CHINA SLOWING
China Said to Ease Bank Capital Rule to Free Up More Lending
Winds of Inflation Rising
Blackstone’s investment strategist Joe Zidle notes that Blackstone’s private equity group owns over 90 portfolio companies, which together employed over 460,000 people as of June 30, 2018. “Over 60% of our CEOs believe pay will need to increase 3% or more in 2018, ahead of government figures.”
He adds that economy-wide,
The number of people quitting relative to getting fired hit an all-time high this month. The primary reason why people quit their job in large numbers is because they have something better lined up. Some of the cost will be passed along to consumers, the rest will be absorbed.
More People Quitting vs. Getting Fired Than Ever
Chinese Deals Lose Luster for Officials Across the U.S.
EARNINGS WATCH
As of July 24 (i.e. before yesterday), we had 148 companies in with a 86% beat rate and a surprise factor of +5.7%. Blended Q2 estimates were +21.4% (+17.7% ex-Energy) and Q3 forecasts were for +23.3% (+20.2% ex-Energy). No signs of cracks yet, in spite of
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Big Auto Makers Trim Forecasts GM, Ford and Fiat Chrysler lowered their profit outlooks, each saying that fallout from tariffs on steel and aluminum is weighing on their bottom lines.
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Daimler Follows U.S. Rivals in Warning on Impact of Tariffs German premium car maker Daimler followed its U.S. rivals in warning that earnings would be hit by U.S. tariffs on steel and aluminum, even as a possible easing of trade tensions helped lift shares.
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Facebook’s grim forecast: privacy push will erode profits for years Facebook Inc’s shares lost as much as a quarter of their value on Wednesday after executives said that profit margins would plummet for several years due to the costs of improving privacy safeguards and slowing usage in the biggest advertising markets.Missile maker Raytheon slashes 2018 cash flow forecast Tomahawk missile maker Raytheon Co on Thursday lowered its forecast for annual cash flow due to a $1.25 billion pension contribution in the current quarter.
Cost impact of tariffs laid bare in corporate earnings From toys to tools and trucks, manufacturers tweak supply chains and plan price rises
Donald Trump’s multi-front trade battles are prompting warnings from some of the largest US companies that higher tariffs will squeeze their profit margins, force them to pass on the pain to suppliers and push prices up for consumers. (…)
The executives’ comments also represent a striking change of tone from three months ago, when attention focused on calculating the benefits to companies’ bottom lines of the corporate tax cuts Congress passed at the end of 2017. (…)
So far this year, we have had 2 major corrections in autos and a bear market in housing.
And now FB has joined the bears, trading just below its 200 day m.a.. NFLX is down 15% but still 22% above its 200dma.
Yet, we’re less than 1% from the January highs!
TECHNICALS WATCH
As of yesterday, courtesy of CMG Wealth:
13/34–Week EMA Trend Chart
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Volume Demand vs. Volume Supply
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NDR Crowd Sentiment Poll (Current weekly sentiment reading is 67.7)
Stock Outflows Swell as Investors Seek Refuge in Bonds Investors are fleeing U.S. stocks at a rapid clip as the possibility of a protracted trade dispute between the world’s two largest economies pushes them to seek safety among less risky assets such as U.S. Treasurys.
More than $20 billion was pulled from long-term mutual funds and exchange-traded funds focused on U.S. stocks in June, capping the third-worst first half for equity flows over the past 10 years, according to data provider Morningstar LLC. The trend doesn’t appear to be slowing: Investors redeemed more than $11.6 billion from domestic stock funds in the three weeks ended July 18, according to the Investment Company Institute. (…)
Those sentiments helped drive more than $80 billion of inflows into taxable bond funds in the first half of the year, outpacing the roughly $60 billion that was pulled from U.S. stocks over the same period, according to Morningstar’s data. At the same time, asset managers including investment giant BlackRock Inc. have recently reported a substantial slowdown in inflows. Money coming into passive funds that track the market dropped 44% through the first half of 2018, Morningstar said. (…)
The share of individual investors who expect stocks to fall over the next six months was 39% earlier this month, near its high of the year, according to an American Association of Individual Investors survey. (…)
The supply of debt is also rising. The U.S. government sold $1.1 trillion of notes and bonds in the first six months of the year, a 9.2% increase from the year before. That amount is expected to continue climbing as the Treasury raises cash to help fund the $1.5 trillion tax cut passed in December.
“You now have a risk-free asset that generates something of a real return–that explains a lot of the shift” to bonds from stocks, said Simona Mocuta, an economist with State Street Global Advisors. Investors no longer have to forgo investment income in order to preserve capital, she said. “The risk-reward calculation has changed.”
Hmmm…”something of a real return”. Let’s chart that “something of a real return”, currently 0.11%, for perspective:
