FIG Topics of Interest



“This is an unprecedented situation,” said Arlan Suderman, chief economist for INTL FCStone Inc., who has been analyzing commodity markets for almost four decades. “This will impact food prices globally.”
What started with a few dozen dead pigs in northeastern China is sending shock waves through the global food chain.
Last August, a farm with fewer than 400 hogs on the outskirts of Shenyang was found to harbor African swine fever, the first ever occurrence of the contagious viral disease in the country with half the world’s pigs. Forty-seven head had died, triggering emergency measures including mass culling and a blockade to stop the transportation of livestock. Within days, a government notice proclaimed the outbreak “effectively controlled.”
It was too late. By then, the disease had literally gone viral, dispersed across hundreds of miles in sickened animals, contaminated food, and in dirt and dust on truck tires and clothing. Nine months later, the contagion has spread nationwide, crossed borders to Mongolia, Vietnam and Cambodia, and bolstered meat markets globally.
While official estimates count 1 million culled hogs, slaughter data suggest 100 times more will be removed from China’s 440 million-strong swine herd in 2019, the Chinese zodiac’s “year of the pig.” The U.S. Department of Agriculture forecast in April a decline of 134 million head -- equivalent to the entire annual output of American pigs -- and the worst slump since the department began counting China’s pigs in the mid-1970s.
“China will clearly need to import substantial amounts of pork and likely other meat and poultry to satisfy demand,” Luciano told analysts on an April 26 conference call. Chinese meat purchases may also boost sales of soybean meal, a source of livestock feed, in North America, Brazil, and Europe, he said.

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“We suspect transitory factors may be at work,” Powell said, adding inflation should return to the Fed’s target over time, and then be symmetric around its objective.
“If we did see inflation running persistently below, that is something the committee would be concerned about and something we would take into account when setting policy,” he said.

Powell said the Fed believes a few issues were holding back inflation but it’s likely they are transitory like the change in cellphone rates that impacted inflation several years ago. “We’re going to be watching these things carefully to see if that’s the case,” he said.

“Transitory was word of the day,” said Michael Schumacher, director rates at Wells Fargo. “If you look at pricing for fed funds futures for the end of 2019, it moved by about nine basis points. The market is looking a lot more reasonable.”
Schumacher said the market also reacted to the fact that Powell stressed that the Fed is not moving in either direction at this point, though it sees improvement in the global economy and less threat from risk factors, like trade and Brexit.

“They’re in the middle at this point, not sitting on either end of the teeter totter, which is what they had been telling people, but the market didn’t really believe it,” he said.

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The Federal Open Market Committee is all but certain to hold interest rates steady at the close of a two-day meeting in Washington and repeat in its policy statement at 2 p.m. that the central bank will be patient in making future moves.

The meeting includes no updated forecasts, though Chairman Jerome Powell will give his assessment at a press briefing 30 minutes later.

“The concern for many committee members remains the downside risks to inflation,’’ said Lindsey Piegza, chief economist at Stifel Nicolaus & Co. in Chicago. “Further downward pressure on prices could force the Fed to move from a neutral policy stance to a defensive policy stance sooner than later.’’

Most changes in the Fed’s statement are likely to be in its description of current conditions, reflecting the first-quarter growth of 3.2 percent, which was more than expected, and job growth of 196,000 in March. The committee may upgrade its characterization of the labor market, consumer spending and housing activity.

“The economic data is generally improving, but that is unlikely to matter much until core inflation picks up,’’ said Sarah House, senior economist with Wells Fargo Securities in Charlotte, North Carolina. “There is a high bar for additional tightening until core inflation consistently meets 2 percent.’’

“There is no great reason to tweak anything,’’ said Stephen Stanley, chief economist at Amherst Pierpont Securities in New York. “They are waiting to see the whites of the eyes of inflation before moving again. The main impetus for any cut would be a weakening in the economy.’’

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As central bankers meet Tuesday and Wednesday, they’ll see an economy growing strongly while the core inflation rate slowed to 1.6 percent last month. That’s well below their 2 percent goal and continues a persistent undershoot which has prompted a year-long review of the Fed’s price strategy.
“A big part of the policy rethink has to be making the costs and benefits of these trade offs more rigorous and explicit,” said Julia Coronado, founder of MacroPolicy Perspectives LLC in New York. “How much signal do they want to take from the turn down in core inflation given the growing leverage in the corporate sector that could make the next recession deeper?
Just last month Fed officials were divided over whether to raise a capital buffer on the largest banks. They’ll include a panel on financial stability at a Chicago conference in June on the conduct of monetary policy.
“If financial conditions ease, growth will be higher and monetary policy should respond” with tighter policy, said former Fed Governor Laurence Meyer. Yet central banks’ response to financial risk is often a story of “not yet, not yet, not yet – too late!’’
Fed officials discuss financial stability risks at most policy meetings. The Fed Board in Washington even publishes a semiannual report focused specifically on financial risks. But the committee’s communication on the topic can appear confusing and contradictory.
“How much froth in leveraged lending is the Fed willing to tolerate in exchange for 20 basis points on inflation?’’ Coronado asked a New York Fed advisory panel earlier this month.

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When lawmakers return to Capitol Hill next week, they will begin considering the Pentagon’s colossal budget request. The Defense Department is asking Congress for $718 billion in its fiscal 2020 budget, an increase of $33 billion or about 5% over what Congress enacted for fiscal 2019.

The budget is composed of a $544.5 billion base budget, $9.2 billion for emergency border funding and $164 billion for overseas contingency operations funding, aka the war budget.

The Navy and Marine Corps request $205.6 billion, up $9.9 billion from fiscal 2019; the Air Force calls for $204.8 billion, up $11.8 billion from the last request, and the Army asks for $191.4 billion, up $12.5 billion from fiscal 2019.

Congress has until Oct. 1 to approve the budget or negotiate a new funding deal with the White House.

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The central bank appeared to act to stem declines in the yuan on Friday, when it set the fixing for the currency by more than analysts expected. President Xi Jinping also helped by pledging against currency depreciation that harms other nations.

The PBOC’s move to offer targeted medium-term loans was interpreted as shift back to neutral for monetary policy, indicating the central bank’s ambition to keep money moving through the system while holding back market expectations for broader easing.
It’s a pivotal moment for a world-beating rally in China that’s been underpinned by expectations of more stimulus and ample liquidity. A barrage of earnings from the nation’s largest firms could swing sentiment either way, though the picture isn’t encouraging so far. Traders are also eyeing next week’s trade talks with the U.S., though the closure of China’s markets for a three-day holiday from Wednesday will likely dampen trading.

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At November’s biennial air show in the southern city of Zhuhai, the biggest state-owned missile maker, China Aerospace Science and Industry Corporation Ltd, screened an animation showing a hostile “blue force,” comprising an aircraft carrier, escort ships and strike aircraft, approaching “red force” territory.

On a giant screen, the animation showed a barrage of the Chinese company’s missiles launched from “red force” warships, submarines, shore batteries and aircraft wreaking havoc on the escort vessels around the carrier. In a final salvo, two missiles plunge onto the flight deck of the carrier and a third slam into the side of the hull near the bow.

The fate of the ship is an unmistakable message to an America that has long dominated the globe from its mighty aircraft carriers and sprawling network of hundreds of bases. China’s military is now making giant strides toward replacing the United States as the supreme power in Asia. With the Pentagon distracted by almost two decades of costly war in the Middle East and Afghanistan, the Chinese military, the People’s Liberation Army (PLA), has exploited a period of sustained budget increases and rapid technical improvement to build and deploy an arsenal of advanced missiles.

Many of these missiles are specifically designed to attack the aircraft carriers and bases that form the backbone of U.S. military dominance in the region and which for decades have protected allies including Japan, South Korea and Taiwan.

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Over the last three years, around 3 million Americans over 55 joined or rejoined the workforce, federal data show. The addition of these older workers not only contributed to economic growth, experts say, but helped stop a national decline in the share of adults working or looking for work.

The trend may have run its course. After adding 5 million new and returning workers of all ages from 2016 to 2018, the U.S. labor force shrank during the first three months of this year. (Graphic:

From healthcare to manufacturing, companies in places like Wisconsin are taking longer to hire as they struggle to find workers; some have delayed projects, others have become more willing to hire ex-convicts and less experienced workers bypassed when labor markets were looser, local officials say.

Blue-collar workers are putting in more hours, data show, while overall labor productivity is increasing. Nationally, wages are rising.

The upshot, according to policymakers, business executives and labor experts interviewed by Reuters, is that the labor market may be nearing its limits

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In 1938, in the midst of a long campaign to bring China under Communist Party rule, revolutionary leader Mao Zedong wrote: “Whoever has an army has power.”

Xi Jinping, Mao’s latest successor, has taken that dictum to heart.
He has donned camouflage fatigues, installed himself as commander-in-chief and taken control of the two million-strong Chinese military, the People’s Liberation Army. It is the biggest overhaul of the PLA since Mao led it to victory in the nation’s civil war and founded the People’s Republic in 1949.

Xi has accelerated the PLA’s shift to naval power from a traditionally land-based force. He has broken up its vast, Maoist-era military bureaucracy. A new chain of command leads directly to Xi as chairman of the Central Military Commission, China’s top military decision-making body. Operational leadership of naval, missile, air, ground and cyber forces has been separated from administration and training - a structure that Chinese and Western defense analysts say borrows from U.S. military organization.

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Washington’s lack of attention to European affairs is a costly mistake. Germany’s refusal to reflate its economy and support the continent’s growth is killing the market where the U.S. sold $63.4 billion worth of goods in the first two months of this year — one-fourth of all U.S. goods sales abroad.

That compares with a pitiful $15.6 billion of American exports to China during the same interval. And those sales were down a whopping 20.4 percent from the first two months of last year.
Washington’s priority should be to rapidly balance its trade accounts with China. It’s very early days to say that progress is being made, but a 9.2 percent decline in Beijing’s trade surplus with the U.S. in the first two months of this year could be a good beginning.
China should quickly get out of the huge U.S. trade problem it created for itself. Beijing does not need that debilitating liability while it is trying to manage the issues of Taiwan, Tibet, contested maritime borders in the South China Sea, the explosive mix on the Korean Peninsula, a strategic China-Japan-Korea triangle and a sprawling “Belt and Road” global infrastructure investment initiative.

Distracted by China trade, the U.S. economic and political officials had nothing to say to counter that widely shared view during last week’s IMF-World Bank spring session in Washington, D.C.

Germany, as a result, got off scot-free because the prevailing opinion held that Berlin, or anybody else, could not prevent a decline of the world economy while the U.S. continued to undermine the world order resting on a multilateral trading system and a peaceful resolution of global hot spots.

Still, to deflect any further pressures, Germany’s finance minister promised 10 billion euro in annual tax cuts and incentives to boost research and development investments by 1.25 billion euro — a hypothetical total amounting to a derisory 0.3 percent of German GDP supposed to bring the country back to a 1.5 percent growth in 2020.

That’s ridiculous. Washington should talk with the Germans to come up with a credible plan of relaunching the EU economy. Otherwise, Berlin will be under relentless pressure to move during the next G-20 summit — the world’s key economic forum — in Osaka, Japan on June 28 and 29. Berlin’s long-suffering friends like France and Italy should join in, along with the International Monetary Fund and the Organization for the Economic Cooperation and Development.

It would be a great pity if Germany continued to blunder with blatantly bad faith nonsense. Indeed, how could a $3.8 trillion economy, presently sliding into an estimated 0.5 percent growth recession, swiftly recover to a 1.5 percent upturn next year on the strength of a puny 0.3 percent of GDP (hypothetical) fiscal stimulus?

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