Also posted today: THE SITTING BULL
China, U.S. Aim to Ease Trade Rift China and the U.S. have quietly started negotiating to improve U.S. access to Chinese markets, after a week filled with harsh words over Washington’s threat to use tariffs, people with knowledge of the matter said.
The talks, which cover wide areas including financial services and manufacturing, are being led by Liu He, China’s economic czar in Beijing, and U.S. Treasury Secretary Steven Mnuchin and U.S. trade representative Robert Lighthizer in Washington.
In a letter Messrs. Mnuchin and Lighthizer sent to Mr. Liu late last week, the Trump administration set out specific requests that include a reduction of Chinese tariffs on U.S. automobiles, more Chinese purchases of U.S. semiconductors and greater access to China’s financial sector by American companies, the people said. (…)
Mr. Liu told Mr. Mnuchin in their phone conversation that Washington’s recent trade offensive against China would hurt both countries and the world, the official Xinhua News Agency reported, and he expressed hope that the two sides can work together to “maintain the overall stability of their economic and trade relations.” (…)
The U.S. actually assesses tariffs of 2.5% on imported cars; China’s is 25%. In other areas, the U.S. has higher tariffs than those charged by trading partners, including a 25% tariff on imported pickup trucks and stiff levies on some agricultural products like peanuts.
Washington is also considering the possibility of pressing Beijing to shift some of its semiconductor purchases to U.S. companies from Japanese and South Korean ones, people familiar with the talks said. (…)
“We’re working on a pathway to see if we can reach an agreement as to what fair trade is for them,” Mr. Mnuchin said on Fox News Sunday. (…)
The U.S. is also pressing China to ease restrictions on U.S. financial businesses, particularly requirements that they operate as joint ventures under which U.S. firms are in many cases limited to 51% ownership. (…)
“If they open up their markets, it is an enormous opportunity for U.S. companies,” Mr. Mnuchin told Fox News Sunday. “I am cautiously hopeful we reach an agreement, but if not we are proceeding with these tariffs.”
The FT weekend edition had a good piece (Liu He, the man in charge of China’s economy) on Liu He, reportedly President Xi Jinping’s most trusted advisor. Last Monday, “Mr Liu was formally appointed as a vice-premier with responsibility for the financial sector, state-owned enterprise reform, industrial policy and relations with the US, China’s most important trading partner and principal geopolitical rival.”
A Harvard graduate, Mr. Liu “is an advocate of long-delayed financial and economic reforms. As this year’s leader of the Chinese delegation to the World Economic Forum in Davos, Mr Liu promised Mr Xi would kick off his second term with a reform drive that would exceed “the international community’s expectations”.
“Liu He is now in charge of the economy and he is already pushing us to open up,” says one senior Chinese government official, adding that there will be a raft of significant market liberalisation measures over the next two to three months.”
Mr. Liu’s quick intervention in the trade issues is good news. Along with the major concessions to most allies the Trump administration made on the steel and aluminum tariffs as well as apparent easing on NAFTA talks, investors could get less nervous about protectionism and, perhaps, see through “the art of the deal”.
In truth, China’s economy is too saddled with debt to risk an all out trade war with the U.S.. But Mr. Trump also faces an indebted economy as well as other adverse conditions:
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For U.S. Farmers, China Tariffs’ Timing Is Brutal Trade battle comes as U.S. farm incomes are expected to slide to their lowest level in more than a decade
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China warns U.S. it will defend own trade interests The United States has flouted trade rules with an inquiry into intellectual property and China will defend its interests, Vice Premier Liu He told U.S. Treasury Secretary Steven Mnuchin in a telephone call on Saturday, Chinese state media reported.
(…) In his call with Mnuchin, Liu, a Harvard-trained economist, said China still hoped both sides would remain “rational” and work together to keep trade relations stable, the official Xinhua news agency reported. (…)
“China has already prepared, and has the strength, to defend its national interests,” Liu said on Saturday. (…)
Global Times said Beijing was only just beginning to look at means to retaliate.
“We believe it is only part of China’s countermeasures, and soybeans and other U.S. farm products will be targeted,” the widely-read tabloid said in a Saturday editorial. (…)
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Mnuchin ‘Hopeful’ Truce Can Be Reached With China on Trade
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U.S. and South Korea Reach Trade Agreement
Meanwhile:
New FCC Rule Would Step Up U.S. Fight Against China’s Huawei The FCC is considering a new rule to further curb the U.S. business of Huawei, making it harder for small and rural carriers to purchase gear from Chinese telecom-equipment makers.
(…) People familiar with the matter said the FCC proposal would limit subsidies for carriers that use Huawei gear—blocking them from drawing from the Universal Service Fund, an $8-billion-a-year government program supported by fees, amounting to a few dollars each, that are tacked onto individual phone bills. The fund subsidizes companies that offer broadband service in rural America and provides affordable wireless plans to low-income cellphone users, among other programs.
The FCC proposal is aimed at barring all Chinese telecom-equipment manufacturers, including Huawei and smaller rival ZTE Corp. , from benefiting from Universal Service Fund subsidies, people familiar with the matter said. (…)
. Washington is trying to prevent a future where most telecommunications electronics are made by Huawei and other Chinese-based manufacturers. Some officials fear Beijing could order such companies to exploit knowledge of how the equipment is designed to spy, disable communications or launch cyberattacks.
Washington has focused on Huawei as it has emerged as a top manufacturer of cellular-tower electronics, internet routers and other products that wireless and broadband providers need. Huawei is also the world’s No. 3 smartphone brand. (…)
Meanwhile, a bipartisan group of House members have co-sponsored a bill that would bar the U.S. government—and its contractors—from using electronics from Huawei or ZTE.
U.S. Factory Goods Orders Rise at Best Rate Since June
Orders for durable goods—products designed to last at least three years, such as industrial robots and refrigerators—increased 3.1% from the prior month to a seasonally adjusted $247.72 billion in February, the Commerce Department said Friday. The bigger-than-expected gain was the largest since June 2017.
A closely watched proxy for business investment, new orders for nondefense capital goods excluding aircraft, rose 1.8% in February—the best gain since September—to $67.83 billion. (…)
Better capital spending last month could be a sign that businesses are beginning to respond to changes in tax law. New tax rules that went into effect this year were designed to incentivize businesses to increase capital investments. (…)
Demand for U.S.-made primary metals increased 2.7% on the month and was up 13.7% through the first two months of the year, compared with the same period last year. Orders for fabricated metal products increased 0.8% during February and were up 12.2% to start 2018, from 2017. (…)
Nondef. ex-air new orders are back to their previous cyclical highs after posting solid gains since June 2017, well before tax reform. However, unfilled orders, i.e. backlogs, are not showing much momentum, down in each of the last 3 months to levels which are only 1.5% above last year.
Auto Dealers Worry Prices May Be Getting Too High As the automotive industry braces for changes including electrification and autonomy, dealers across the U.S. are worried about something much simpler: the price of a new car.
(…) The average price of a car to date through February is about $32,200, about $500 more than the price of a vehicle last year, according to J.D. Power, as manufacturers roll out new models with additional technology and safety features, justifying an increase in price. Customers are also buying more SUVs and pickup trucks, which come with a higher transaction price compared with sedans. (…)
Average monthly payments now exceed $525 a month, according to Edmunds.com, with the online-shopping company estimating that interest rates on new-vehicle loans hit an eight-year high in February. (…)
Toyota’s chief executive of North America, Jim Lentz, called the tariff a “tax on the U.S. consumer” and said if vehicles increased about $200 across the industry because of the tariff, that is a $3.4 billion tax on the U.S. consumer. (…)
Same with housing…
FLASH PMIs:
At 54.3 in March, down from 55.8 in the previous month, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index has remained above the 50.0 no-change threshold for just over two years. The latest upturn in business activity was faster than the average over this period, driven by solid rises in both manufacturing production and service sector output.
There were also positive signals for the near-term growth outlook, with new order volumes expanding at a strong pace and payroll numbers picking up to the greatest extent since May 2015. Moreover, business confidence towards growth prospects over the coming 12 months remained among the highest seen over the past three years.
The latest survey signalled another robust increase in average cost burdens across the private sector economy, with the rate of input price inflation unchanged from February’s 52-month peak. In the manufacturing sector, input price pressures were the greatest for six-and-half years.
A combination of sharply rising operating expenses and resilient demand conditions contributed to another marked increase in average prices charged by private sector companies. March data indicated the second-fastest rate of output charge inflation since September 2014.
(…) The surveys are running at a level consistent with annualised first quarter GDP growth approaching 2.5% (though we note that official GDP estimates may once again understate growth in the opening quarter of the year).
The survey’s employment index is meanwhile at its highest for nearly three years and indicative of another strong payroll rise in the order of 240,000 in March.
The improved hiring trend reflects buoyant optimism regarding future growth. Companies’ expectations for output in the year ahead remained elevated, dipping slightly in services but surging to a three-year high in manufacturing.
Inflationary pressures meanwhile remain a key theme of the surveys, especially in manufacturing, reflecting increased raw material prices, notably for metals. The survey found average prices charged for goods and services are rising at one of the strongest rates seen since 2014. Furthermore, with factory costs showing the largest jump for seven years amid growing shortages of key inputs, inflationary pressures appear to be on the rise.
Eurozone business activity grew at its slowest rate for over a year in March, according to the flash IHS Markit Eurozone PMI. At 55.3, down from 57.1 in February, the headline output index was the lowest since January of last year and signalled a second successive monthly easing in the rate of expansion. January’s PMI had been the highest since June 2006.
Output growth moderated in both manufacturing and services, the latter seeing business activity grow at the slowest rate for five months while factory output increased at the weakest pace since January 2017.
Both sectors also saw new order inflows wane, with goods export orders showing the smallest rise since November 2016. Measured overall, inflows of new orders showed the smallest monthly increase seen over the past 14 months.
Employment growth also slowed slightly to a six month low in March, but the survey nevertheless still registered one of the largest monthly rises seen over the past 17 years.
Despite the rise in employment, the survey data also brought further evidence of business growth being hindered by capacity constraints. Backlogs of work rose to a greater extent than February, albeit increasing at a slower pace than seen at the turn of the year, while manufacturing vendor delivery times again lengthened to one of the largest extents over the past 18 years, reflecting widespread supply chain delays amid strong demand for inputs.
Sharply rising input costs meanwhile again led to a historically marked rise in average selling prices for goods and services. Although rates of inflation cooled for a second month in a row, both costs and selling prices continued to rise at some of the fastest rates seen over the past seven years. Higher input costs were linked to rising raw material prices as well as increased wages and salaries.
While the first quarter average PMI reading remains relatively robust, indicative of GDP rising by 0.7-0.8%, the loss of momentum since the buoyant start to the year has been quite dramatic.
At least some of the slowing may be ascribed to bad weather in some northern regions and, perhaps more importantly, ‘growing pains’ resulting from the strength of the recent growth spurt. Supply chain delays and raw material shortages were often reported to have stymied production in manufacturing (delays in German supply chains are currently more widespread than at any time in the survey’s 22-year history), and both manufacturing and services sectors also saw activity being curtailed by growing incidences of skill shortages. Backlogs of work continue to rise as a result of these growth constraints.
However, other factors are clearly at play. The fact that export order book growth has more than halved since the end of last year suggests the stronger euro is taking an increasing toll on export performance. Survey responses also highlighted how political uncertainty also appears to have intensified, dampening demand.
The data therefore suggest that eurozone growth peaked around the turn of the year and the region is settling into a slower, but still robust pace of expansion. Price pressures have meanwhile also eased slightly, in part linked to cheaper imports arising from the euro’s recent strength, but remain elevated.
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Japan: Weakest improvement in business conditions since October 2017
- Flash Japan Manufacturing PMI® declines in March to 53.2, from 54.1 in February.
- New orders increase, albeit to weakest extent in five months.
- Job creation eases amid joint-softest pace of output growth since July 2017.
The headline PMI declined in March, signalling a weaker improvement in overall business conditions in the manufacturing sector. Output, new order and employment growth rates all slowed, while longer lead times continued to impact supply capacities.
That said, with new business increasing for an eighteenth straight month, firms raised output prices to a quicker extent, signalling confidence in the demand climate and purchasing power of their clients. Despite two months of weaker headline PMI readings, the 2018 Q1 average still signals a robust operating environment.
Stephanie Pomboy: How the Fed Will Trigger the Next Crash
(…) The problem is that nobody is looking at: A) what’s driving that consumer spending, and B) how consumers are funding it. When you go through that kind of detail, you discover that they are buying more because they have to. They are spending more on food, energy, health care, housing, all the nondiscretionary stuff, and relying on credit and dis-saving [to pay for it]. Total retail numbers have done nothing but go down. We’ve seen the biggest increase in food and energy outlays since 2011, accounting for 30% of the increase in consumer spending in the past six months, up from 11% in the two years prior. Consumers have had to draw down whatever savings they amassed after the crisis and run up credit-card debt to keep up with the basic necessities of life.
After the crisis, total savings rose from $440 billion to $1.4 trillion. Now it’s back to $400 billion. Consumers have basically taken every penny they socked away and spent it. (…)
Households are borrowing 90 cents for every incremental dollar they spend, up from 40 cents four years ago. (…)
The tax cut alleviates the squeeze on household pocketbooks, and might mitigate the potential debt-delinquency issue as the cost of debt service on stressed households rises [as the Fed raises rates]. But debt service is increasing at a rate that will eliminate the entire effect of the tax cut. For households, you’re looking at an annual increase in debt service of $75 billion. The tax cuts were estimated to have an $80 billion to $100 billion impact for the economy this year. (…)
The pension funding problem will be the next crisis. We are looking at a $4 trillion pension deficit across the public and private sectors in the U.S., after nine years of rampant asset inflation. That’s a stunning statistic. If the market corrects even 15%, and stays there, it will bore massive holes in pensions. New Jersey, Illinois, state after state, are struggling to figure out how to close this gap. This is a real problem the Fed will have to confront if the market goes down. For [Fed chief Jerome] Powell, there’s the additional burden of being the new guy. He can’t come in and, as his first act, blink. If they don’t tighten now, it will send panic to the Street.
(…) we have $1 trillion in issuance still to come. It’s very important to watch how the market digests that. You know, the stock market is utterly dependent on free money, which drove it in the face of lackluster economic and earnings growth. The idea that we can suddenly reverse quantitative easing and have no knock-on consequences for stocks seems a little pie-in-the-sky. If QE was designed to incentivize risk and expand the pool of credit, QT [quantitative tightening] should necessarily beget the reverse. (…)
Canada Inflation Rate Accelerated in February to 2.2%
(…) Underlying prices rose in a range from 1.9% to 2.1%, based on the three preferred gauges used by the Bank of Canada for an average of 2%, versus the previous month’s 1.8% average. (…)
U.S. Stocks End Worst Week in Years
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Stocks Sink as Trade Moves, Tech Worries Rattle Investors U.S. stocks suffered their worst week in more than two years, signaling mounting investor anxiety over whether factors from restrictive trade policies to rising interest rates could disrupt the nine-year bull market.
(…) “There’s multiple things going on, and none of it good,” said Larry Peruzzi, managing director of international equity trading at Mischler Financial. “Six months ago, everything was good and you couldn’t find a reason to sell stocks. Now you can’t find a reason to hold them,” he added. (…)
The week’s selling came as many investors were grappling with a number of potential threats, including rising interest rates, a possible tightening of regulations for tech giants and data suggesting some slowdown in economic growth in Europe. (…)
Investors are now questioning whether recent challenges for Facebook “mark in some way the high point of the freewheeling global marketplace for data,” said Guy Monson, chief investment officer at Sarasin & Partners, and “whether the tariffs agenda is transactional posturing by a businessman president to achieve better terms of trade…or the beginning of a longer term ideology.” (…)
(…) Three-month Libor, the main benchmark, was set Friday at 2.285%, up from 2.2% a week earlier and 1.69% at the end of 2017, according to Peter Boockvar, chief investment officer at Bleakley Advisory Group. That was the No. 1 negative news last week, topping even the Trump tariffs, according to his summation of the week’s market events, as Libor’s spread over overnight rates has widened sharply. (…)
(…) It’s a lot to try to figure out, and a lot more complicated than last year’s tranquil trading or even February’s correction, says Jean Ergas, chief economist at Tigress Financial Partners, who adds turnover in the White House to the mix. Investors are now forced to contemplate multiple scenarios simultaneously and figure out which stocks have the most potential upside—and downside as well. “It’s a very complex situation,” Ergas says. “Investors [are] mutating into jugglers.” (…)
One more:
Oil hits $70 as risk to Iran nuclear deal mounts Trump’s appointment of hardliner John Bolton as security adviser pushes crude higher
(…) US president Donald Trump announced late on Thursday that he had appointed hardliner John Bolton as his national security adviser, raising the chances of a collapse of the nuclear deal with Iran that he has opposed. This could hit crude exports from Iran, which have rebounded since the country agreed with western powers to curb its nuclear programme in return for an easing of sanctions.
“Combined with the nomination of Mike Pompeo, another hawk, at the State Department, most of the market will conclude that at the minimum the Iranian nuclear deal is dead,” said Olivier Jakob at consultancy Petromatrix. (…)
Separately, Saudi energy minister Khalid al-Falih suggested production cuts led by Opec and Russia could remain in effect into 2019. (…)
Share Buybacks on Pace for a Record Year
As of March 2, there were 98 buyback announcements, amounting to about $151 billion worth of stock repurchases, notes JPMorgan Chief U.S. Equity Strategist Dubravko Lakos-Bujas.
Thanks partly to tax reform and repatriation and to higher earnings growth, he estimates there could be as much as $842 billion worth of stock buybacks on an annualized basis this year, up from $530 billion last year—a 60% increase. The expected 2018 level would be the highest ever, with the closest previous amount reached in 2007. (…)
The share repurchases will also affect aggregate earnings-per-share growth. Through the reduction of shares outstanding, not actual growth, last year’s $530 billion of buybacks added two percentage points to the market’s EPS growth. With over $800 billion expected this year, Lakos-Bujas estimates the bump up to the market’s EPS at about 3%.
FAIR TRADE?
The 10% correction along with sharply rising profits and tax reform combined to bring the Rule of 20 P/E back to 20.0 “fair value” if we “normalize” 2017 EPS with a 7% accretion from tax reform:
TECHNICALS WATCH
Lowry’s Research says that this is but a correction in a rising market, evidenced by the recent outperformance of mid and small-cap stocks and the number of mid and small caps reaching new 52-week highs. Buying Power remains strong while Selling Pressure is not weakening much.