Ross Signals More Tariff Pain Ahead in China Trade Battle
Commerce Secretary Wilbur Ross signaled there’s more pain ahead unless China changes its economic system, as the Asian nation repeated it will never surrender to U.S. trade threats.
“We have to create a situation where it’s more painful for them to continue their bad practices than it is to reform,” Ross said in an interview on Fox Business Network on Thursday. The U.S. will keep turning up the pressure on China for as long as the country refuses to level the economic playing field, said Ross.
“The reason for the tariffs to begin with was to try and convince the Chinese to modify their behavior. Instead they have been retaliating. So the president now feels that it’s potentially time to put more pressure on, in order to modify their behavior,” he said. (…)
“China is fully prepared and will have to retaliate to defend the nation’s dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries,” China’s Ministry of Commerce said in a statement Thursday on its website. The “carrot-and-stick” tactic won’t work, it said. (…)
Along with its pledge to fight back, China also left the door open for a resumption of negotiations. “China has consistently advocated resolving differences through dialogue, but only on the condition that we treat each other equally and honor our words,” the ministry said.
The U.S. is open to renewing formal negotiations with China, though Beijing must agree to open its markets to more competition and stop retaliating against U.S. trade measures, according to two senior administration officials who briefed reporters Wednesday on the condition of anonymity. (…)
Ross said on Thursday that imposing U.S. tariffs on what would add up to about half of all Chinese imports, which were valued at more than $500 billion last year, won’t cause a major economic upheaval.
A 25 percent levy “on $200 billion, if it comes to pass , is $50 billion a year,” said Ross on Thursday. “$50 billion a year on a $18 trillion economy” is a fraction of a percent, he said, adding “It’s not something that’s going to be cataclysmic.” (…)
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The RSM has a different math:
The initial costs of the first few rounds of the prolonged trade spat are coming into view. Those costs will be concentrated in a number of critical industrial ecosystems. If the tariff policy is fully implemented, the costs will likely exceed $1.3 trillion with risk of a much greater hit to the U.S. economy than many are currently anticipating, and a premature end to the business cycle.
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Facing U.S. tariff threat, Toyota warns car costs could rise
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China Rejects U.S. Request to Cut Iran Oil Imports
Euro area economic growth slows at start of third quarter
The pace of euro area economic expansion eased in July, ceding most of the momentum gained in the prior survey month. At 54.3, the final IHS Markit Eurozone PMI® Composite Output Index was down from 54.9 in June and unchanged from the earlier flash estimate.
The slowdown was mainly centered on the service sector, where growth eased from June’s four-month high. Manufacturing production rose at a slightly faster pace that was broadly similar to that signalled for services activity.
National PMI data pointed to a broad-based expansion of economic output, with growth registered in all of the countries covered by the survey. The rate of increase in Germany improved to a four-month high, whereas growth slowed in France (two-month low), Italy (two-month low), Spain (56-month low) and Ireland (four-month low).
The principal factor underlying slower output growth was a weaker expansion in new work received. New business growth was the second-slowest in over one-and-a-half years. Only Germany saw its rate of expansion improve. Alongside weaker growth of new order intakes, reduced optimism about future business performance also contributed to the generally subdued picture. Although companies continued to forecast that economic activity would (on average) be higher in one year’s time, the overall degree of positivity dipped to a 20-month low. Confidence improved slightly in Germany and France, but dipped in Italy, Spain and Ireland. (…)
July saw a modest easing in price pressures. That said, rates of inflation in output charges and input costs remained elevated and above their respective long-run averages. Input price rises were linked to rising fuel and other oil-related cost increases, which a number of companies passed on to their clients.
The final IHS Markit Eurozone PMI® Services Business Activity Index posted 54.2 in July, down from June’s four-month high of 55.2 and below the earlier flash estimate of 54.4. It was the second lowest reading during the past year-and-a-half. (…)
If the headline index continues to track at its current level, quarterly GDP growth over the third quarter as a whole would be little-changed from the softer-than expected expansion of 0.3% signalled by official Eurostat data for quarter two.
The outlook seems to be turning into a straight choice between the upturn being sustained at its current subdued pace or rising headwinds reining in growth further during the months ahead. On this front, downside risks are more prevalent, as the slower expansion in new order inflows during July was partnered by a tandem dip in business optimism to a 20-month low. Both are reflecting the uncertainty about global market conditions, especially given the ongoing rhetoric about trade wars and the potential spillover effects to the broader economy and to manufacturing in particular.
Improved domestic demand may offset some of this in the near-term, but will need to strengthen further if it is to maintain that role. The faster growth seen in Germany, if sustained, should also help in this regard, especially if it can aid in reversing the weaker expansions seen in its eurozone partners such as France, Italy and Spain during July. However, given rising signs of slowdown and the current uncertain outlook, the ECB will likely maintain its cautious approach to policy at present.”
Chinese business activity expands at slower rate in July
Business activity growth across China slowed at the start of the third quarter, according to the latest Caixin China Composite PMI™ data (which covers both manufacturing and services). This was shown by the Composite Output Index falling from 53.0 in June to 52.3 in July.
The slowdown in overall growth momentum was broad-based, with both manufacturers and service providers in China registering weaker increases in activity in the latest survey period. Notably, service sector output rose at the slowest rate for four months in July, as illustrated by the seasonally adjusted Caixin China General Services Business Activity Index falling from 53.9 in June to 52.8. Meanwhile, manufacturing production rose only modestly.
Growth in new orders also softened across both monitored sectors in July, most notably across the service sector. Furthermore, the latest increase in new business placed with service providers was the weakest recorded for just over two-and-a-half years and modest. According to panellists, relatively subdued market conditions had contributed to the slower rise in new orders. At the same time, new business received by manufacturers rose at the softest pace since April. Consequently, new work at the composite level increased at the slowest rate for just over a year.
Chinese services companies continued to add to their payroll numbers during July. However, in line with the trend for business activity, the rate of job creation softened since June and was only slight. Employment across China’s manufacturing sector remained on a downward trend at the start of the second half of 2018, though the rate of job shedding eased slightly from June. At the composite level, workforce numbers fell for the second month in a row, albeit marginally.
Higher staffing levels and increased efforts to clear unfinished workloads led to a further decline in outstanding business at services companies in July. Though slight, the rate of backlog depletion was the quickest recorded since the start of 2016. In contrast, capacity pressures persisted at goods producers, as highlighted by a further rise in the level of work-in-hand at manufacturing companies. Overall, outstanding business rose at the weakest rate since September 2017.
Average input costs continued to rise across both the manufacturing and service sectors in July, with the former noting the sharper rate of growth. The increase in input costs faced by goods producers remained steep, despite the rate of inflation easing since June. Meanwhile, services companies registered a strong rise in operating expenses that was generally linked to higher fuel and raw material prices, alongside greater salary costs.
As was the case for input costs, output charges rose across both monitored sectors at the start of the third quarter. That said, manufacturers raised their selling prices at the slowest pace for three months, while services companies increased their charges at the joint-weakest rate since September 2017. Overall, output prices rose at the softest pace since the start of the year.
July survey data signalled a marked deterioration in optimism among services companies, with the level of positive sentiment edging down to the joint-lowest on record. Confidence at manufacturers was meanwhile little-changed from June, remaining historically subdued. At the composite level, optimism towards the year-ahead outlook for business activity fell to the lowest level in 32 months.
Secular inflation?
From Richard Berstein, Chief Executive and Chief Investment Officer, Richard Bernstein Advisors:
We’re not wild about these types of charts, but Chart 4 compares the current cycle’s inflation with the secular period of inflation from the 60s and 70s. We are not showing this chart to suggest that inflation will follow a definitive pattern. Rather, we show it to demonstrate how benignly one of the worst inflationary periods in US history started. That might be worth considering simply because investors remain quite sanguine about inflation given the economic and policy backdrop. (http://www.rbadvisors.com/images/pdfs/Overheating_Ahead.pdf).
EARNINGS WATCH
380 companies in, 80% beat rate and +5.1% surprise factor. Q2 EPS now seen up 23.6%, from up 20.7% July 1 and +22.9% July 31.
Trailing EPS now $148.05 or $152.40 pro forma the tax reform for 12 months.
Thomson Reuters published its first tally of corporate pre-announcements for Q3, the first warning that the positive momentum may be ending: there are more pre-announcements and they are slightly more skewed towards the negative side than at the same time in 3Q17 and 2Q18.
1 thought on “THE DAILY EDGE (3 August 2018):”
The China/US tariff showdown appears headed to the Nuclear Option.
Not China selling Treasury Bills, however. A China embargo on global sales of Rare Earth Elements.
While the US military may have stockpiled some rare earth elements, an embargo would affect a huge swath of global technology production, including autos, missiles, avionics, batteries, computers and iPhones.
Once iPhones become scarce or more expensive because of this spat, it will probably be solved. Global pressure from allies could also swiftly resolve the trade dispute if it escalates to a Rare Earth Element embargo.
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