THE DAILY EDGE: 27 AUGUST 2019: Communications

Trump Shifts Tone on China But Not Tactics as Deal Grows Distant

(…) After spending a weekend listening to fellow Group of Seven leaders urging him to ease tensions with China, Trump pointed to recent calls and an amiable speech by China’s top negotiator as signs Beijing wanted a deal. He shrugged off, however, the uncertainty his trade war has caused and showed no signs of backing down in an increasingly bitter trade dispute that’s chipping away at global economic growth and sending world markets tumbling.

“It’s the way I negotiate. It’s done very well for me over the years. And it’s doing even better for the country,” Trump told reporters. Those clamoring for a deal lacked his “guts” and “wisdom,” he added. (…)

U.S. and Chinese officials have held working-level calls and are due to hold more in the coming days. But China seems reluctant to resume talks focused on what they see as an onerous 150-page draft text that was left behind when talks broke down in May, people briefed on the discussions said.

Both sides have talked about holding face-to-face talks in Washington in September, but China has so far stopped short of committing to those negotiations and some U.S. officials have been reluctant to hold another round if nothing of substance can be achieved. (…)

A few minutes later, with Macron having left the stage, Trump expressed frustration that Xi was meeting every escalation that he deployed with one of his own. “Now, when I raise and he raises, I raise and he raises, we can never catch up,” Trump said.

“‘We’re down on the floor, lower than the floor. We can’t make a 50-50 deal. This has to be a deal that’s better for us,” Trump said. “And if it’s not better, let’s not do business together. I don’t want to do business.”

After 24 Hours, China Still Unaware of Calls Mentioned by Trump

China declined to confirm phone calls with the U.S. that President Donald Trump claimed happened over the weekend, during which Trump said China indicated it wanted to work toward a trade deal.

“I’m not aware of that,” Chinese Foreign Ministry spokesman Geng Shuang said at a regular briefing in Beijing on Tuesday. “Regretfully the U.S. has announced its decision to add new tariffs on Chinese products. Such maximum pressure will hurt both sides and is not constructive at all.” (…)

Hu Xijin, editor-in-chief of China’s Global Times, said in a tweet that top trade negotiators hadn’t spoken by phone in recent days and that Trump was exaggerating the significance of the trade contacts. U.S. Treasury Secretary Steven Mnuchin said “there were discussions that went back and forth and let’s just leave it at that.” (…)

China’s top trade negotiator, Vice Premier Liu He, said Monday China is “willing to solve the problem through consultation and cooperation with a calm attitude,” which Trump cited as a positive signal. (…)

From the NYT:

Trump claimed to have gotten two phone calls on Sunday night from high-ranking Chinese officials seeking to negotiate a trade deal. “High-level calls,” he said. Chinese government officials said Monday that they were unaware of any such calls. When Trump asked Treasury Secretary Steven Mnuchin to back him up, Mnuchin would only say there had been “communication,” avoiding the word “call.” The treasury secretary quickly interjected again Monday afternoon to add “communications.”

From the South China Morning Post:

(…) Chinese Vice-Premier Liu He, Beijing’s top trade negotiator, said on Monday at a Chinese technology conference that an escalation of the trade war was not in anyone’s interests. “We are willing to resolve the issue through consultations and cooperation with a calm attitude and resolutely oppose the escalation of the trade war,” he said.

Trump, known for his use of hyperbole, cited Liu’s remarks as evidence that China wanted a trade deal. When speaking to reporters, Trump also appeared to misidentify Liu’s seniority, describing him as the No 2 politician in China under Xi.

“The vice-chairman of China – do you get any higher than that, other than President Xi?” Trump asked. “The vice-chairman made the statement that he wants to make a deal, that he wants to see a call made, mister, he wants it all to happen.”

There is no position of vice-chairman in the Chinese political system.

Although He is vice-premier and Xi’s top economic aide, Liu does not sit on the Politburo Standing Committee, the elite seven-member decision-making body, and ranks lower than Chinese Premier Li Keqiang and Vice-President Wang Qishan. (…)

The actual calls:

Hu Xijin, editor-in-chief of the state-run tabloid Global Times, also wrote on Twitter that the two sides had maintained contact at a “technical level”, which “doesn’t have [the] significance that President Trump suggested”.

China says it hopes U.S. can create conditions for trade talks

China’s foreign ministry reiterated on Tuesday that it had not heard of any recent telephone call between the United States and China on trade, and said it hopes Washington can stop its wrong actions and create conditions for talks.

Ministry spokesman Geng Shuang made the comment at a news briefing, after U.S. Treasury Secretary Steven Mnuchin said there had been contact between the two sides but declined to say with whom. (…)

Trump says Japan trade deal reached, but Abe warns more work remains

President Trump said Sunday that he had reached a trade pact “in principle” with Japanese leader Shinzo Abe, in an apparent effort to gin up support for a tough-talk negotiating style that he says is bearing fruit.

Abe, however, said more work had to be done, and it was unclear what format the trade pact might ultimately take. (…)

Meanwhile, in the real world:

• Farmers’ Frustration With Trump Grows as U.S. Escalates China Fight

Peppered with complaints from farmers fed up with President Trump’s trade war, Sonny Perdue found his patience wearing thin. Mr. Perdue, the agriculture secretary and the guest of honor at the annual Farmfest gathering in southern Minnesota this month, tried to break the ice with a joke.

“What do you call two farmers in a basement?” Mr. Perdue asked near the end of a testy hourlong town-hall-style event. “A whine cellar.”

A cascade of boos ricocheted around the room. (…)

Farm bankruptcy filings in the year through June were up 13 percent from 2018 and loan delinquency rates are on the rise, according to the American Farm Bureau. (…)

While there are few signs of an imminent blue wave in farm country, a growing number of farmers say they are losing patience with the president’s approach and are suggesting it will not take much to lose their vote as well. (…)

“We’re not starting to do great again,” Brian Thalmann, the president of the Minnesota Corn Growers Association, told Mr. Perdue at the event. “Things are going downhill and downhill quickly.”

On Monday, after a 72-hour period during which Mr. Trump twice escalated his trade war with China, Mr. Thalmann said he could no longer support the president as he did in 2016.

“At some point we have to quit playing games and get back to the table and figure this out,” Mr. Thalmann said. “There’s no certainty to any of this.” (…)

A July survey from Farm Journal found that 79 percent of 1,100 farmers still back Mr. Trump despite the lack of progress in negotiations with China. And Mr. Perdue largely remains an effective emissary, with the industry still hoping Mr. Trump can pull off the kind of trade deal he has been promising.

“He’s one of us; he’s a farmer,” Brad Kremer, a Wisconsin farmer who is the treasurer of the American Soybean Association, said of Mr. Perdue. “I think he’s got a tough job in a tough administration.”

Wait, wait! the NYT article missed the most recent Farm Journal Pulse results dated Aug. 23 which shows Trump’s approval down to 71% with the “strongly approve” down 10% to 43%.

  

• Transportation Drives U.S. Durable Goods Orders Higher

Manufacturers’ orders for durable goods rose 2.1% in July (0.7% year-on-year) following a slightly downwardly revised increase of 1.8% gain in June. The Action Economics Forecast Survey expected a 1.4% gain. Orders for transportation equipment jumped 7.0% (2.3% y/y) powered by a 44.2% jump in volatile aircraft orders (-2.8% y/y); orders for motor vehicles increased 0.5% (3.8% y/y). Nondefense capital goods orders less aircraft, which is a forward-looking indicator of capital spending, grew 0.4% (-0.3% y/y), following a 0.9% increase in June. In the second quarter, inflation-adjusted non-residential fixed investment declined at a 0.6% annual rate (+2.7% y/y).

Excluding the transportation sector, orders declined 0.4% in June (-0.1% y/y). (…)

Shipments are rolling over as a result:

And backlog keeps falling:

Chicago Fed: “Index points to slower economic growth in July”

(…) When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended. (…)

German IFO Is Weakest Since 2012

Iran’s Rouhani Spurns U.S. Talks: ‘We’re Not Interested in Taking Photos’

The U.S. must lift sanctions on Iran if it wants to negotiate, President Hassan Rouhani said on Tuesday. His foreign minister, Javad Zarif, said during a visit to China and Japan that “a meeting between Iran’s president and Trump is unimaginable.” (…)

“We are interested in solving problems in a reasonable way, but we’re not interested in taking photos,” Rouhani said in a televised speech to officials in Tehran. “The key to changing the relationship is in Washington’s hands.” (…)

Rouhani would need approval to enter talks from Supreme Leader Ayatollah Khamenei, who so far hasn’t signaled a willingness to engage with the U.S. The American president’s top aides, including Secretary of State Michael Pompeo, have argued that Khamenei, not Rouhani or Zarif, must address U.S. demands if a lasting deal is to be struck. (…)

EARNINGS WATCH

We now have 483 reports in and earnings look like they will end up 3.2% (3.9% ex-Energy) after +1.6% (+3.0%) in Q1.

Revenue growth is 4.7% in Q2 (5.1% ex-E) after +5.7% (+6.2%).

Q3 earnings are now expected to decline 1.9% from +0.8% on July 1. Q4: +4.8% down from +7.2% on July 1.

Trailing EPS inched higher to $164.42. The Rule of 20 P/E is 19.8 at today’s pre-opening of 2893.

The S&P 500 Index peaked on December 20, 2018 before making the Fed pivot on its tightening path. Since then, just about every equity market in the world is down. Interestingly, U.S. smaller caps were among the weakest, likely a reflection of the perceived vulnerability of domestically focused companies to an eventual economic slowdown.

Yesterday, I posted an NBF chart showing that the S&P 500 companies with the largest foreign exposure were outperforming those with the largest domestic exposure.

Yet, the U.S. consumer is the only solid contributor to the economy while most foreign markets, presumably mirroring foreign economies, are weaker than the U.S. large cap indices. FYI, since December 20, 2018, the S&P Consumer Staples index is up 6.2% and the Consumer Discretionary index is up a huge 17.8%.

The only reason I see is a concentration of equity funds in the most liquid stocks and in technology companies. The Nasdaq 100 index is up 22.2% since December 20, 2018. Yet, technology earnings in the S&P 500 have meaningfully underperformed:

Hmmm…

Norway’s $1tn oil fund advised to cut European stock holdings Norges Bank suggests shifting toward greater North American weighting

The FT says that the oil fund owns “the equivalent of 1.5 per cent of every listed company globally”. North American equities currently represent 41% of the funds, Europe 34%. “Norway’s central bank said that under full market weights, Europe would account for just 20 per cent while North America would increase to 48 per cent. If the amount of free float — or shares that are readily available to trade — was taken into account, Europe would drop to 19 per cent of equities while North America would rise to 57 per cent.”

AMERICANS IN CHINA

Costco shuts early on first day in China due to crowds Officials warn over heavy traffic as shoppers flock to store on opening day in Shanghai

The FT reports that traffic was jammed within 1km from the Costco store on Tuesday and Costco suspended operations in the afternoon. Shoppers delighted on cheap meat, milk powder and New Zealand apples according to the FT.

The article adds that German supermarket chain Aldi opened its first stores in China 3 months ago. Meanwhile, France’s Carrefour sold a majority stake in its China operations to local retailer Suning for $700m in June, following Britain’s Tesco and Spain’s Dia which have also sold out of the country. The FT sayst that Germany’s Metro is in the process of selling its China unit. For its part, Walmart is still expanding in China, but is struggling for a decent market share.