THE DAILY EDGE (8 March 2017)

U.S. Consumer Credit Usage Slows

Consumer credit outstanding increased $8.8 billion (6.3% y/y) during January following a $14.7 billion December increase, earlier reported as $14.2 bil. (…) Nonrevolving credit gained $12.6 billion (6.4% y/y) in January after an $11.2 billion increase. (…) Revolving consumer credit balances declined $3.8 billion (+6.0% y/y) and reversed a $3.6 billion increase. (…)

U.S. Posts Biggest Monthly Trade Deficit in Nearly Five Years The U.S. posted its biggest monthly trade deficit in nearly five years in January, a potential short-term drag on growth that highlights broader economic forces working against the Trump administration’s plans to reshape the country’s international economic agenda.

The foreign-trade gap for goods and services increased 9.6% from the prior month to a seasonally adjusted $48.49 billion in January, the Commerce Department said Tuesday. That was the highest monthly level since March 2012. (…)

U.S. exports rose 0.6% last month while imports jumped 2.3%. (…)

January’s imports of autos and parts were the highest on record. U.S. imports of crude oil were the highest since July 2013 while the price per barrel was the highest since August 2015.

Haver Analytics has more details:

The value of goods imports increased 2.5% (9.1% y/y) following a 2.0% jump. It was the largest monthly increase since March 2015. Nonauto consumer goods imports surged 4.8% in January (7.9% y/y) following little change during the prior two months. Imports of motor vehicles & parts increased 2.9% (4.1% y/y) following a 5.5% jump. (…) Capital goods imports rose 1.3% (6.0% y/y), but foods, feeds & beverage imports eased 0.5% (+4.9% y/y). (…)

Goods exports gained 0.3% in value (9.0% y/y) after a 4.0% strengthening. Auto & parts exports jumped 10.8% (9.9% y/y), while industrial supplies & materials exports gained 5.8% (10.7% y/y). Foods, feeds & beverage exports increased 5.6% (22.2% y/y). To the downside, capital goods exports declined 4.2% (+1.1 % y/y) and nonauto consumer goods exports eased 0.1% (+2.9% y/y). (…)

COULD IT BE THE WEATHER?

(…) the month of March begins following an unseasonably warm winter period that allowed for manufacturing activity to occur during a period where inclement weather normally abounds. This is an interesting point because two years ago, the BEA adjusted the “seasonal adjustment” factors to compensate for the cold winter weather over the previous couple of years which had suppressed first quarter economic growth rates. (The irony here is that they adjusted adjustments for cold weather that generally occurs during winter.) However, the problem with “tinkering” with the numbers comes when you have an exceptionally warm winter. The new adjustment factors, which boosted Q1 economic growth during the last two years now creates a large over-estimation of activity during the first quarter of a year where winter weather is unseasonably warm.

This anomaly has boosted “bullish hope” as the fear of an economic slowdown has been postponed. At least temporarily until the over-estimations are revised away over the course of the coming months. (…)

Weather or not, some things are not right in these charts from The Daily Shot:

And this related chart from Bespoke:

Fed to make sequential hikes until ‘something breaks’: Gundlach Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on Tuesday he expects the Federal Reserve to begin a campaign this month of “old school” sequential interest rate hikes until “something breaks,” such as a U.S. recession.

China’s Newest Economic Data Don’t Add Up For the second day running, data out of China have economists scratching their heads.

Tuesday came a surprise increase in foreign-exchange reserves. Wednesday, it was an unexpected trade deficit—China’s first in three years—which made the rise in Beijing’s currency hoard even harder to account for. (…)

Chinese imports in February were up 45% from a year earlier in yuan terms, accelerating from January’s 25% pace, while exports increased just 4.2%. The result: a trade deficit of 60.36 billion yuan ($8.74 billion). (…)

Foreign-exchange reserves rose in February by $6.92 billion to $3.005 trillion, the first rise in eight months. (…)

For January and February combined, China had a trade surplus of $42.2 billion—down 56% from a year earlier, but still a boost for the currency reserves. (…)

A combination of a trade deficit and the revaluation effect, plus the capital outflows China has been experiencing for several months, ought to have forced more central-bank intervention.

One possible explanation: The pace of capital outflows has actually slackened. Chinese regulators have imposed restrictions on moving money out of the country, and a relatively stable yuan-dollar exchange rate may have reduced Chinese individuals’ desire to exchange their savings for other currencies.

Still, Mr. Setser said the data overall suggest money may also be moving back into China.

“The hard part though is [foreign exchange] valuation would imply a fall in headline reserves, and they rose—and with the trade deficit, that implies capital inflows, which is a really big shift,” he said.

If capital really is coming into the country in greater quantities, the next mystery is where exactly it is going. (…)

Chinese to me! But what else is new? China’s growth has been too smooth to be believable anyway.

A Taxing Problem for Investors A corporate tax cut could provide a big boost to profits, but investors are expecting too much from it

(…) By Goldman Sachs’s reckoning, the effective tax rate for companies in the S&P 500—which includes not just federal, but also state and local taxes—is 28%. Under the House plan, Goldman figures it would drop to 24%, boosting after-tax earnings by about 10%. (…)

A recent study from economists Juan Carlos Suárez Serrato and Owen Zidar suggests that over time about one-third of the tax cut would end up going toward workers rather than shareholders.

A lower corporate tax rate also might convince some companies to reassess their use of tax havens, notes Tax Policy Center co-director Eric Toder. Any profits they redirect toward the U.S. would then be subjected to a higher tax rate (20% is low, but Bermuda’s 0% is lower), raising their tax rate. Thus, the effective rate might not fall as much as advertised.

For Goldman strategist David Kostin, the biggest sticking point on the tax cut is that investors seem to expect tax cuts to come into effect sooner than is likely. The brewing fight over House Republicans’ emerging health-care plan may take a big chunk out of the congressional calendar this year. Tackling health care first may not necessarily reduce the odds of an eventual corporate tax cut, but it does make it less likely to happen this fiscal year. (…)

• GOP Disagrees on How—and Whether—to Pay for Tax Cuts A fight is brewing among congressional Republicans over whether a planned tax overhaul has to pay for itself or can cause the deficit to increase, which could make the measure harder to pass.

• New Health Plan Sparks Debate Over Obamacare Comparisons House Republicans are facing criticism that their sweeping plan to repeal and overhaul large swaths of the Affordable Care Act is too similar to the law it would replace.

• Conservatives in Revolt Over G.O.P. Health Care Bill

• No Wonder the Republicans Hid the Health Bill

(…) More than 20 million Americans gained health care coverage under the A.C.A., or Obamacare. Health experts say most would lose that coverage under the proposal. (…)

• A Historic Health-Care Moment The House plan isn’t perfect, but it’s the only reform opportunity Republicans will get.

(…) Opening this critical legislative campaign is a test of how well Republicans can manage political and economic reality. The House bill is a center-right compromise that works off a status quo that has accumulated for years, and its architects know they can’t design a health-care system de novo. The bill has flaws that come from accommodating what the votes in Congress will allow. Still, if this passes, it will be a major achievement, and real progress. (…)

The House proposal can be improved with amendments—and more work will be necessary in future years to make medicine more affordable, promote innovation, protect the most vulnerable and give patients more control of their health-care dollars. But the bill is a major down payment on a brighter health-care future. Republicans have a limited window for repeal and replace, and this is a once-in-a-generation opportunity. Democrats understand this, even if some conservatives don’t.

China Calls on U.S., North Korea to Avoid ‘Head-on Collision’

China’s foreign minister urged North Korea to halt its nuclear activities and the U.S. to suspend nearby military drills, as a way to quell growing tensions and get Kim Jong Un back to the negotiating table.

“The two sides are like two accelerating trains coming towards each other, with neither side willing to give way,” Foreign Minister Wang Yi said Wednesday in Beijing. “The question is, are the two sides really ready for a head-on collision? Our priority now is to flash a red light and apply brakes on both trains.” (…)

• US missile shield drives wedge between S Korea and China

(…) The move underlines Seoul’s preference for military and ideological ties with the US over its economic and historical ties with China, in a show both of Washington’s commitment to the region and Beijing’s failure to pull Seoul out of the American security orbit.

(…) the magnitude of Beijing’s opposition has caught Seoul off-guard.  Beijing has banned Chinese tour groups from South Korea. The move followed months of ever-increasing pressure on South Korean interests in China. (…)